By Richard Rubin and Ashlea Ebeling

The Trump administration's rapid shrinking of the Internal Revenue Service is ending some large audits and putting others in limbo. That is the early fallout of a retreat from stepped-up tax enforcement that could dent compliance and cost the government tens of billions of dollars in revenue.

Treasury Secretary Scott Bessent hasn't detailed his plans for the IRS, its employees and operations. But a new direction is clear. Tough talk about pursuing tax dodging by corporations and high-income households is gone, and the administration is leaning more on technology for taxpayer service and enforcement. That would reverse the recent IRS push to put more people on telephone lines, in walk-in centers and on the front lines of audits and collections.

The IRS expansion started by former President Joe Biden screeched to a halt after President Trump took office. The new administration fired 7% of IRS employees, mostly from the enforcement staff, and froze hiring. The Republican Congress moved to rescind almost all the enforcement spending Democrats approved in 2022. Former IRS officials expect thousands of further job cuts soon, though the Treasury Department hasn't announced a specific target.

The administration mostly delayed taxpayer-service cuts to avoid damaging tax-filing season, so the most immediate changes are being felt in enforcement.

Bryan Skarlatos, a New York tax lawyer, said an IRS appeals officer on a long-running partnership case called and said he was leaving the government soon. He asked for Skarlatos's best offer and settled on taxpayer-favorable terms. In two other cases involving high-net-worth individuals, Skarlatos said, the IRS closed recently opened audits without seeking money.

"We have seen agents just disappear from cases that we're in the middle of, and I don't know what's going to happen," said Kathy Pakenham, co-head of the tax controversy practice at law firm Vinson and Elkins, who saw a ramp-up in IRS activity for 18 months and then a rapid drop-off. "We have seen like a switch flipping in the number of audits that are being started."

It has been a turbulent period at the IRS, which has had three commissioners and three chief counsels this year as Biden's picks resigned and acting replacements exited or were pushed aside.

The IRS fired 7,400 probationary employees from about 100,000 total workers, including more than 1,000 in the large-business and international division that handles the biggest cases. Some probationary workers are being rehired under court order and placed on leave. Another 4,700 accepted the government's deferred-resignation offer.

"That's just money being thrown away," said Barry Johnson, who retired in January after running the IRS's research-and-analytics division. "It seemed counterproductive to me to lose staff we worked so hard to recruit and bring on."

Biden administration officials repeatedly highlighted enforcement efforts aimed at corporations and wealthy individuals and argued that a strong IRS was good for America. Now, the country is flipping from an IRS scrutinizing corporate jets and large partnerships to one that is smaller and stressed.

The administration's view, a Treasury official said, is that tax compliance is critical but that Biden's expansion added too many people.

"We are doing a big review," Bessent said on NBC on Sunday. "I have three priorities for the IRS: collections, privacy and customer service. And we'll see what level is needed to prioritize all those."

The Senate will soon consider confirming Billy Long, the former Missouri congressman who is Trump's pick to run the agency. Long is trying to create an "efficient, transparent and accountable" IRS, said Senate Finance Committee Chairman Mike Crapo (R., Idaho).

'No strategy here'

Former officials, such as Trump's first-term pick to run the agency, see potentially dangerous consequences ahead. They warn that weaker enforcement would reduce revenue far beyond savings from firing workers and worry about disruptions to tax filing. Some expect longer telephone wait times and doubt computers can replace humans as quickly as Trump allies expect.

"There's no strategy here except to, I don't know, weaken the IRS and replace it with apps," says Nina Olson, who was the national taxpayer advocate, the agency's in-house critic, for 18 years. "It's completely different from anything I've seen before."

One big concern: Hollowing out the IRS could erode a valuable asset -- high voluntary tax compliance by households and businesses. People pay partly because of social norms against lawbreaking and partly because they fear getting caught. Now, Americans pay about 85% of what they owe, with direct IRS collections adding 2%, levels that research suggests are above many European countries.

David Kautter, who was acting IRS commissioner and a top Treasury official in Trump's first term, said the new approach might work -- if officials protect core functions.

"If you want change fast, this is about the only way I know of to do it, " he said. "We've tried the slow, incremental way, and not much has happened. So I don't know how else to shock the system other than something like this."

The emerging Trump administration vision could use data analytics and artificial intelligence to identify problems in returns and manage audits. The administration, citing the IRS's spotty record of late and costly technology projects, is pausing modernization work to evaluate the agency's strategy and reliance on outside contractors, the Treasury official said.

The IRS has made plenty of missteps over the years, but it has taken some recent technological steps forward. It created Direct File, a free tax-filing platform for simpler returns. The IRS added new features to online taxpayer accounts, made progress upgrading 1960s-era technology that undergirds individual records and added callback options to customer-service lines.

Even with better technology, agency veterans say people are crucial. Many taxpayers aren't computer-savvy or prefer talking to a person about complex questions. The agency still receives paper correspondence that must be opened, read and sometimes manually entered into computers. Enforcement, too, requires people to handle problems flagged by computers, particularly for the trickiest cases.

A person familiar with the administration's IRS inquiries said the Department of Government Efficiency team assigned to the agency thinks far more can be automated than is actually feasible. The team's questions, the person said, suggested that the administration sees technical solutions to nearly every problem.

An IRS spokeswoman declined to comment.

Agents shown the door

The IRS is the essential agency that Americans love to hate, and the agency's fortunes seesaw depending on who controls the government. A Republican-led austerity drive sent audit rates plummeting and pushed the workforce below 74,000 in 2019 from nearly 95,000 in 2010. Michael Faulkender, Trump's pick for deputy Treasury secretary, pointed to that period during his confirmation hearing, saying, "We continued to successfully collect revenues."

Then, the IRS was led by Charles Rettig, a California tax lawyer picked by Trump. Rettig argued that the agency was outgunned against wealthy taxpayers and that expanding enforcement would more than pay for itself. In a memo this month, Rettig said further changes should be done for efficiency and not reverse recent progress.

"A disabled, underfunded IRS significantly benefits unidentified, noncompliant taxpayers at the direct expense of compliant taxpayers," he wrote.

Democrats, in part citing Rettig's warnings, gave the agency $80 billion in 2022, starting a multiyear transformation to upgrade technology, service and enforcement. Most of that plan now won't happen.

Under a Republican deal with Biden, Congress clawed back more than $20 billion from the $45.6 billion designated for audits and collections. Lawmakers just effectively reclaimed another $20.2 billion. That most recent change will reduce revenue by $66 billion over 10 years, according to the Congressional Budget Office.

Deborah Martarella, an experienced accountant, was almost a year into her job in the Global High Wealth department when she was fired. She said she was auditing a person who failed to report $4 million in income and had $7 million of private-jet depreciation with no apparent business use.

Martarella said she thought officials might keep the most qualified, trained people. "Obviously the government is bloated and inefficient, but going with a chain saw isn't the way to go about it," she said.

For large, sophisticated taxpayers, the best outcome is no audit at all. But lawyers and accountants say they often prefer a talented auditor to an inexperienced or weak one.

Larry Campagna, a Houston tax lawyer, was defending an audit for a corporate client facing a civil investigation about research-and-development claims. Three weeks after a promising full-day meeting with the agent and witnesses, the agent said he was taking the government's deferred-resignation offer, and the audit was transferred to someone else.

"The agent was convinced that very likely we hadn't done anything improper. Now we're back to square one," Campagna said. "Every time you change agents there's a cost to both the government and the taxpayer. You can't cut the workforce in half and expect the people left can handle the work."

Write to Richard Rubin at richard.rubin@wsj.com and Ashlea Ebeling at ashlea.ebeling@wsj.com

(END) Dow Jones Newswires

March 18, 2025 05:30 ET (09:30 GMT)

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