The shrinking of the IRS by 26% this year will likely make next year’s filing season a lot more onerous. But its impact is already being felt by tax professionals and the clients who rely on them.
And in the long run, it could cost the US billions. The IRS is conducting far fewer audits, which have a far greater ROI than taxpayer service. It’s lost many experienced auditors with specialized skills, who can conduct the examinations of corporations and high-net-worth taxpayers that bring in far more revenue than audits of lower-income people.
What’s more, the news that the IRS has been hampered could reduce compliance.
“The direct effect” of the job cuts “is that there’s fewer people auditing your tax return,” Elena Patel, co-director of the Urban-Brookings Tax Policy Center, told CFO Brew. “But we also worry about indirect effects.” Compliance might be affected if taxpayers assume the IRS isn’t auditing “as carefully or frequently” as usual, she said.
The Yale Budget Lab, making the assumption that IRS layoffs will result in less compliance, estimates that staff losses like the ones seen this year will significantly increase the size of the “tax gap,” or the difference between what taxpayers owe and what the IRS actually collects. Layoffs of 22,000 IRS personnel, it posits, will add an additional $160 billion to the tax gap by 2026, which currently sits at $700 billion. (The IRS is set to lose around 26,000 staffers this year.)
Missing audits and massive delays: Tax attorney James Creech, a principal at accounting firm Baker Tilly, has seen the effects of the IRS job cuts firsthand. He frequently contacts the IRS on behalf of clients seeking refunds or handling audits. These days, he says, there’s often no one around to pick up the phone.
“It’s heartbreaking,” he told CFO Brew. “It’s screaming into the void.” Frequently, he said, “something goes wrong on the IRS side; we know what went wrong, but we can’t get anybody on the phone to correct it.” Correspondence is slow. “Even if you do everything right, it can be an incredibly extended amount of time to hear back from the IRS. You might have to resubmit things two, three times to get them to process it once,” he said.
The situation’s frustrating for him, and it’s hurting clients, Creech said. Issues with the IRS can involve “very significant dollars, or the timing of it can be really significant,” he said. Businesses are putting plans on hold, he added, because funds they planned to direct toward certain projects “aren’t coming through.”
Audits, too, have gotten lost in the chaos. The number of audits Creech sees has gone down “pretty drastically,” he said. Audit cases he’s pursuing remain in limbo as the IRS staff working on them have resigned. “Some audits have disappeared,” he said. “ We don’t know what’s happened to them, and there’s been nothing reassigned.”
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Audit rates fall alongside IRS staffing: Since January, the IRS has lost 3,070—or upward of 26%—of its revenue agents, who conduct audits, TIGTA reported. By March alone, 18% of the IRS’s revenue officers, who perform collections, had left.
A look into the recent past hints at what this can mean for audits. Between 2010 and 2019, the IRS lost around 21,000 employees, or 22% of its workforce. The number of audits during that time period plummeted by 58% across the board. Complex audits were disproportionately affected. Among individual filings, audits of people making $200,000 or more saw the largest decline. Audits of companies also decreased significantly: In 2010, for instance, nearly 98% of companies with assets over $20 billion were audited; in 2019 just around half were.
Risky business: News that the IRS is performing fewer audits could tempt taxpayers and companies to test boundaries. “Corporations have the most complicated tax returns,” and the ability to “employ sophisticated tax preparers” like Big Four accounting firms, Patel said. That makes them more difficult to audit, even when IRS staff levels are high and the experienced auditors who work on complex audits are still around.
“Knowing that the IRS has limited capacity to audit,” Patel said, companies “can be more aggressive in the way that they claim their credits and deductions.”
People in the accounting world are already seeing this happen. At the AICPA’s ENGAGE conference this June, former IRS commissioner Chuck Rettig warned an audience of accountants that their clients might want to pursue risky strategies in the wake of IRS staff cuts. “You will be approached by people with aggressive tax planning situations,” he said, recommending they temper the expectations of clients who “look at current IRS turmoil as an opportunity to maybe get a little more aggressive.”
Pursuing riskier tax strategies based on current IRS staffing levels, though, could backfire in the long run. IRS staffing levels have fluctuated dramatically over the years, and, as Creech pointed out, the agency has a long memory. “All IRS audits are looking in the rear-view mirror,” he said, noting that the IRS can potentially look back through five or six years of tax returns on areas such as depreciation.
His advice? “No one ever loses sleep by trying to get things right.”