Former government officials, practitioners, and tax law and policy experts are in lockstep with their collective worries about the ramifications of ongoing IRS workforce reductions and the agency’s agreement to disclose taxpayer information to immigration enforcement officials and the integrity of the tax system broadly.
Ongoing IRS developments. The IRS entered the year with approximately 100,000 employees. Like other federal agencies, the IRS has seen mass firings, voluntary resignations, and a revolving door in key leadership position — with more reductions in force on the way now that the tax filing season is over. Changes at the IRS under the Trump administration are most evident by the currently vacant role of commissioner. Since former Commissioner Danny Werfel’s resignation in the middle of his five-year term, two acting commissioners have also stepped down.
First, long-time IRS veteran Doug O’Donnell retired after a brief return to the role of acting commissioner at the beginning of President Trump’s second term. O’Donnell, a career IRS official, previously bridged the gap between former Commissioner Chuck Rettig and Werfel. He recommended Melanie Krause to replace him as the next interim agency head until the confirmation of a permanent commissioner, supposedly Trump’s pick, former House representative Billy Long.
Krause this month also vacated the acting commissioner post following reported disagreements with Elon Musk’s Department of Government Efficiency (DOGE), Treasury Secretary Scott Bessent, and the Department of Homeland Security over the agency’s mutually agreed upon framework for an information exchange of immigrant tax data. According to government court filings in a legal challenge to the now-signed Memorandum of Understanding (MOU), the agencies can legally assist criminal investigations by procuring information normally protected from disclosure under Code Sec. 6103.
It is unclear how much smaller the agency intends to make the IRS or how many employees it will have in the coming months, or what will ultimately become of what remains from the Inflation Reduction Act funding. In January, the once-$80 billion appropriation that was supposed to be allocated over the span of a decade was reduced by about $20 billion and reallocated elsewhere in the budget.
There is consensus, however, throughout the tax community that taxpayers and professionals alike will feel the combined effects from these contributing factors.
Technology modernization. The IRS has been in need of systems upgrades for a long time, but such a massive undertaking requires resources, namely manpower, time, and funding, George Mason University Professor R. William Snyder told Checkpoint. “[T]heir computer systems are so old… and they do not talk to each other very well,” said Snyder. “It’s a very manual process and it just takes forever. And they just cannot seem to get enough funding to actually convert all the systems over.”
Snyder foresees the IRS reverting to its state during the COVID-19 pandemic, marred by backlogs of unprocessed paper returns and communications, understaffed team, and delays. For example, while the ability to scan paper returns “doesn’t take that long” and is supposed to be an example of where automation has helped the agency, the “slowest” parts of the process are after a return is scanned and how that data is digested in the system. So if current technology at the IRS’ disposal cannot compensate for potentially tens of thousands of employees suddenly gone, its performance improvements in the years since the worst of the pandemic will be lost, he said. The state of the agency may “be about as bad as before.”
At a panel discussion hosted by the Tax Law Center at New York University Law April 10, former Treasury Deputy Secretary Wally Adeyemo said modernization for the IRS is “really hard” because it must balance trying to “build on top of an old system” while still collecting taxes. The IRS does not have the luxury of starting from scratch and building something new from the ground up, he said.
These issues are compounded by the Trump administration and DOGE’s approach to reducing waste and streamlining workflows at Treasury and the IRS, Adeyemo, a Biden appointee, continued. DOGE “had the potential” to take a “modular approach” by bringing in “a bunch of talented people who know something about technology to help us think through some of these challenges.”
Improvements should be made “system by system,” Adeyemo said. “This isn’t the type of place where experimentation is going to be useful if it’s not done in a way that allows you to make sure that the current system continues to function for the benefit of the American people.”
Funding instability. Tax Policy Center (TPC) Senior Fellow Janet Holtzblatt in an April 2 blog post commented that although the Inflation Reduction Act clawbacks did not touch funds marked for improving taxpayer services and modernization, “the initial allocations for those accounts were much smaller than the increases in enforcement funding: $3.2 billion for taxpayer services and $4.8 billion for technological modernization.”
She added that after the Inflation Reduction Act passed, “Congress zeroed out the annual appropriation for modernization.” Elaborating on the “moving target” these upgrades have been for the agency, Holtzblatt said at the onset of a two-panel virtual event hosted by the TPC that the “rationale” was that the IRS would simply spend from the additionally appropriated amounts. “Now, the catch is” these frozen annual appropriations “meant that they were getting no inflationary increases over this period,” she said.
During times of high inflation, the IRS was borrowing from the extra funding cover “normal expenses” like cost-of-living wage adjustments for employees, Holtzblatt continued. In recent months, however, the issue became not the cost of payroll, but who would still be around to do the work that can’t be automated to improve the IRS’ tech infrastructure? She said that between reported upcoming layoffs and updated estimates on the number of IRS employees that have accepted “fork-in-the-road” buyout offers, the agency may lose about a third of its overall workforce, perhaps as much as 50%.
Tax Law Center Executive Director Chye-Ching Huang released a statement in response to reporting that more than 20,000 IRS employees have accepted resignation. The administration’s buyouts “will cost the federal government hundreds of billions of dollars in revenue while putting taxpayer services and privacy at risk as critical employees are either laid off or see no alternative but to resign their posts,” she said.
Pete Sepp, president of the National Taxpayers Union (NTU), during Tuesday’s first TPC panel discussed testimony NTU provided before a House Ways and Means Oversight Subcommittee Hearing in February about the return on investment from the Inflation Reduction Act’s IRS funding.
He said NTU told the subcommittee how there “were serious problems in the modernization effort, ones that we had seen for decades prior to IRA funding.” Sepp cited a report from the Treasury Inspector General for Tax Administration issued just before the hearing, which found that the IRS lacked “plans to measure its overall transformation progress, baselines, or information on the specific processes that will be used to measure its success.” Sepp added that “the IRA funds may have run out by now for modernization, and we have zero in appropriations.”
“How in the world is anything going to press forward in that environment?” he said.
Former National Taxpayer Advocate Nina Olson, now leading the Center for Taxpayer Rights, said during the same panel the lack of reliable year-to-year funding for the IRS impedes modernization efforts. The agency for years has seen “those fits and starts” where it “gets funding one year and then doesn’t have funding” the next, said Olson.
Programs start and then stop, often never to be picked up again, she explained, which begs the question: “what does that mean to everything that’s been invested” already up to this point?
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