In a significant move that could impact the Internal Revenue Service (IRS) and its enforcement capabilities, the agency is set to lay off about 7,000 probationary employees starting this week. This major reduction in workforce is seen as a setback to the IRS’s efforts aimed at targeting affluent tax evaders, potentially leading to adverse effects on revenue collection, according to analysts.
The majority of those affected by the layoffs are newly hired workers tasked with compliance, which includes ensuring taxpayers adhere to tax laws and addressing outstanding debts, among other responsibilities. The union representing employees of the Treasury Department has raised concerns that these layoffs, among the largest this year in government, might lead to diminished customer service and delays in tax return processing, particularly with the tax filing deadline approaching in less than two months.
This drastic action occurs amidst efforts from the Department of Government Efficiency, overseen by former Trump advisor Elon Musk, to streamline the federal workforce and make significant cuts to government spending. Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center, expressed concerns during a recent media call, stating that the cuts at the IRS would severely hinder the agency’s enforcement capabilities against wealthy tax evaders. She emphasized that depriving the IRS of adequate funding and staffing compromises its ability to confront affluent individuals who often have expensive legal representation, ultimately resulting in reduced revenue.
The passage of the Inflation Reduction Act in 2022 authorized an allocation of $80 billion to the IRS, allowing for the hiring of thousands of new employees and upgrading technological systems to enhance both customer service and tax enforcement. However, subsequent actions by congressional Republicans have reduced some of this financial support. Former IRS Commissioner Daniel Werfel, appointed by President Biden, concentrated efforts on auditing high-income individuals exploiting tax loopholes, including those who misuse business aircraft for personal use and those seeking tax advantages through Puerto Rico without meeting necessary criteria.
A report from the Congressional Budget Office highlighted the implications of reduced IRS funding on forecasted future revenues, presenting various scenarios based on the extent of budget cuts. Specifically, a cut of $5 billion would decrease projected revenues by $5.2 billion between 2024 and 2034, while deeper cuts of $20 billion and $35 billion could result in revenue shortfalls of $44 billion and $89 billion, respectively, over the same period, exacerbating the federal deficit. Williamson asserted that starving the IRS would unwittingly benefit tax evaders.
Treasury Secretary Scott Bessent asserted during his confirmation testimony that the U.S. faces a spending issue more than a revenue issue. However, revenue collection and government spending continue to be contentious topics among congressional Republicans, particularly in discussions about financing extensions to the tax cuts from the Tax Cuts and Jobs Act enacted under President Trump. Analysts predict that retaining these tax cuts could inflate deficits by an estimated $4 trillion over the coming decade.
Chye-Ching Huang, the executive director of NYU’s Tax Law Center, criticized the layoffs as misguided, warning they would ultimately disadvantage American taxpayers and could encourage tax evasion among wealthy individuals and corporations. Doreen Greenwald, president of the National Treasury Employees Union, voiced strong criticism of the administration’s decision amid tax season, claiming it would disrupt timely customer service and the efficient processing of tax returns.
The union has responded to the layoffs with multiple legal challenges, asserting the detrimental effects these job cuts could have on the IRS’s operations. Mark Mazur, a former assistant secretary for tax policy at Treasury, noted that the majority of laid-off workers were part of the division handling small businesses and self-employment, which could force employees dealing with larger corporate enforcement issues to shift their focus to less stringent small business cases. He indicated that this shift would undoubtedly result in decreased enforcement efforts, undermining the deterrent effect of audits.
As of now, representatives from the Treasury, the IRS, and the White House have yet to respond to requests for comments regarding these developments.
