Thousands of IRS Firings Foreshadow Delays, Enforcement Drop

Thousands of cuts to the IRS workforce threaten to throw a wrench in the agency’s plans to ramp up tax enforcement and will likely delay refunds for complex filers.

While tax professionals and agency veterans agree companies and individuals won’t feel an immediate impact of the cuts during filing season, the ripple effect after April 15 is another matter, especially with a chunk of the workforce eligible to retire in several years.

“We’ll see in a year and a half that high-net-worth clients who support this administration are upset because they didn’t get their refund, and they’re going to be demonizing the IRS over that and not connecting that consequence with this action today,” said Megan Brackney, tax controversy partner at Kostelanetz LLP.

IRS officials this week said the agency expects to terminate 6,700 recent hires out of its roughly 100,000 employees, ceding to the Trump administration’s plans to shrink the federal government. Still, the full scope of how many in each division were let go and what happens to their portfolio remains unclear.

“The impact that I worry about is on morale,” said Dave Kautter, a partner at RSM LLP and former assistant secretary for tax policy at the Department of Treasury. “If you have ever been to an organization that is downsized or challenged financially, the atmosphere is completely different than that of one on an even path or one that is growing.”

Drops and Delays

After decades of flat or decreased funding and increasing responsibilities from Congress, the Democrats’ 2022 tax-and-climate law gave the IRS tens of billions in supplemental cash to catch tax evasion, modernize and improve customer service.

The funds helped the agency hire thousands to beef up its efforts in these areas. This staffing increase leaves the agency in a better position to handle drops in its workforce numbers, tax professionals said, though taxpayers may start to see a regression in services if funding isn’t maintained.

Many of the improvements the agency made in the last two years with the tax-and-climate law money will likely be lost because of the staff cuts, said Melissa Wiley, tax controversy partner at Kostelanetz LLP.

The Small Business/Self-Employed Division, which has over 20,000 employees, plans to terminate over 3,500 probationary employees this week. Many of those employees likely were still in training so there won’t be much impact on current open examinations, said Charles Rettig, former IRS commissioner during the first Trump administration and a shareholder at Chamberlain Hrdlicka, in an email.

“Much of that training is conducted by experienced examiners and IRS Counsel, who will now return to the field to assist in current examinations and ongoing litigation,” Rettig said, adding that there will be an impact on the ability of the IRS to expand the number of examinations going forward.

In the years to come, the IRS will have fewer resources for enforcement because there’s not a bench of trained employees ready to take over from those who retire, said Michael Damasiewicz, a principal at TAACS LLC who worked at the IRS for 30 years. That could lead to more fraud as people try to take advantage of lower audit rates.

“At some point, the pendulum will swing back and there will be more enforcement, but it’ll get a whole lot worse before it gets better,” Damasiewicz said.

Companies and individuals in meetings with the agency may also see a drop in the number of IRS employees who attend, Kautter said. There was an uptick in the number of employees sitting in his client’s meetings with the agency as IRS employees were training.

In addition to delays in refunds for complex taxpayers, Brackney said she expects the timeline for appeals to increase and encouraged clients to make a deposit on the taxes the IRS says they owe so they don’t accrue interest while they wait for audits to resolve.