By Abby Schultz

Efforts by Elon Musk's Department of Government Efficiency to slash staff at the Internal Revenue Service -- while it already struggles with Congressional funding cuts -- could lead to more wealthy individuals and businesses cheating on their taxes.

That's because many of the initial cuts affect the agency's compliance and enforcement abilities, including complex audits of these taxpayers, tax and budget experts say.

"When you underpay and understaff the IRS, the agency doesn't have the power or the resources it needs to go after wealthy taxpayers with their high-priced lawyers," Vanessa Williamson, a senior fellow at the Urban-Brookings Tax Policy Center said in a late February session with the media. "The result is, of course, a disaster for revenue."

DOGE intends to shrink the IRS' approximate 100,000-person staff by at up to a third this year, according to news reports. That is on top of Congress' actions to claw back or freeze more than half of the $79.4 billion allocated to the agency through the Inflation Reduction Act of 2022, known as the IRA.

The staff and budget reductions are "very costly and undermine the administration's stated goals of reducing fraud and abuse," said Samantha Jacoby, deputy director of federal tax policy at the Center on Budget and Policy Priorities, a nonpartisan research and policy institute in Washington.

In response to questions about the cuts, a Treasury spokesperson said the department "is considering a number of measures to increase efficiency, including a roll back of wasteful Biden-era hiring surges, and consolidation of critical support functions to improve both efficiency and quality of service. No final decisions have yet been made, and any current reporting to the contrary is false."

The IRA funding was intended to upgrade the agency's technology, and strengthen operations, enforcement, and taxpayer services, the U.S. Treasury inspector general for tax administration said.

A goal was to close the annual $700 billion gap in how much the government is owed and how much tax is paid by providing more forceful oversight of taxes owed by the wealthy and corporations. That's because it can be more challenging for the government to know how much businesses and the wealthy earn on their investments, for instance, than it is to know how much everyday Americans earn when taxes are withheld from their paychecks.

A wage earner "can't significantly underreport their income," Jacoby said.

Depleting the agency's workforce before the technological solutions the IRS has been working on to operate more efficiently and effectively are completed hurts the agency's ability to collect taxes that are owed, said Danny Werfel, the former IRS commissioner under President Joe Biden, who resigned in January.

The result "shifts the burden of funding the government from those who don't play by the rules to those that do," Werfel said.

That shift already appears to be taking place, according to the Washington Post. Senior tax officials at Treasury and the IRS told the newspaper they are projecting federal revenue could fall by 10%, or more than $500 billion year over year, as individuals and businesses forgo filing or don't make scheduled payments.

Treasury disputed the account. "Upon internal tax analysis, there is no indication a $500 billion tax revenue drop is plausible," a spokesperson said, noting that tax revenue from corporations and individuals for this fiscal year "have both already outpaced" revenue from fiscal year 2024. "Baseless claims from those who have promoted wasteful spending for years at the IRS should be dismissed out right [sic], as they strive to ensure taxpayer funds continue to be wasted in a sad attempt to stop meaningful reforms."

A DOGE employee leading this effort is Sam Corcos, who is also CEO of Levels, the health and wellness software company. On March 21, Corcos told Fox's Laura Ingraham that the IRS has been trying to modernize its systems for over 30 years and is $15 billion over budget. "We are in a really deep hole right now," Corcos said.

Werfel agrees the IRS's technology should be improved to better serve the public and increase collections. As the Biden administration was ending, "we tried to make clear that the IRS is on a journey to modernize, to automate, to enable an outcome where you can rely on fewer people to get the job done," he said. "But that journey needs to continue."

He added that, "any implication that previous modernization dollars were wasted is inaccurate."

One reason it's conceivable that tax collections could drop is that DOGE fired 6,700 probationary employees in late February, many of whom were brought into the IRS for their expertise and who were being trained to take positions of retiring staff members, Jacoby said.

Of those employees, about 5,000 reportedly worked in compliance, auditing high-income taxpayers and businesses, the Budget Lab at Yale University, a nonpartisan policy research center, said in a mid-March report. An estimated 28% of the annual tax gap is because of the top 1% of income earners failing to pay what they owe, according to the report.

A drastic cut in enforcement could also change the behavior of those who would normally pay their taxes, causing more individuals to forgo filing, the Budget Lab said. As Werfel explained, a key ingredient in getting voluntary compliance to work is "a belief that the IRS is functioning."

Two federal judges ordered probationary workers who had been fired from agencies across the government to be rehired in mid-March. Those who worked at the IRS were placed on administrative leave.

Another 4,700 IRS employees took the voluntary buyout offered by the Office of Personnel Management in January, although they are required to continue working through May 15, so they are on hand through the 2025 tax filing season, Accounting Today reported in early February.

DOGE's actions are consistent with the broader Republican agenda, including extending tax cuts to high-income earners, according to Jacoby.

The wealthy, and businesses, make up a "disproportionate share of the tax gap," she said. "If fewer audits are being done, it will mostly affect that group."

Write to Abby Schultz at abby.schultz@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 01, 2025 02:00 ET (06:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.