SEC and IRS Enforcement Changes Are No Excuse for Lax Behavior

Early actions by the Trump administration indicate there will be fewer enforcement resources and a narrower enforcement scope in 2026 at the IRS and the Securities and Exchange Commission.

I believe the SEC’s shift in enforcement strategy will have both significant costs and benefits, while reductions in IRS enforcement capacity more likely will be detrimental. These changes will carry significant implications for practitioners—auditors, accountants, and tax advisers—and their clients.

SEC’s Enforcement Approach

SEC staffing has declined by roughly 15% due to buyouts and early retirements, and the agency is on track for its lowest number of earnings fraud and auditor-liability enforcement actions since the Reagan administration.

But behind these statistics is a deliberate strategic pivot under Commissioner Paul Atkins, who has promised a return to the SEC’s core mission and advocated for an enforcement philosophy centered on:

• Pursuing clear-cut violations that harm investors (insider trading, accounting and disclosure fraud, market manipulation, offering fraud)
• Avoiding regulation by enforcement; that is, refraining from creating new quasi-rules through aggressive policing of gray areas
• Moving away from policing technical violations (for example, books-and-records offenses or administrative process failures) and assessing corporate-level fines

This shift is partially a reaction to increasing compliance burdens, particularly on public companies. Total SEC investigations, which aren’t publicly disclosed and result in enforcement actions only some of the time, roughly doubled between 2000 and 2017. Data from annual filings show a stark increase in the number of times public companies mention the SEC, suggesting much higher levels of SEC monitoring in recent years.

Regarding corporate-level fines—when a corporation is fined, who actually bears that cost? The market value of the company may decrease, in which case the shareholders pay. But what if the company raises its prices to offset the fine? What if it cuts jobs or wages? Should consumers and rank-and-file employees effectively pay SEC fines? Absolutely not. In most cases, neither should investors.

Atkins rightfully recognizes that corporate fines are folly. Like the corporate tax, the market rather than the government determines who really pays. Moving away from corporate fines toward penalties on the individuals directly responsible for misconduct is a clear step in the right direction.

The change in enforcement strategy is meant to strengthen our capital markets by reducing regulatory costs while keeping investors safe, but a critical question then is whether moving away from a “broken windows” enforcement policy reduces deterrence for major frauds. Broken windows refers to the policing strategy of prosecuting minor violations to create an environment of order and lawfulness, which in turn deters more severe misconduct. Former SEC Commissioner Mary Jo White adopted this strategy during her tenure by implementing sweeps of several types of minor infractions, and a similar approach was undertaken during the Biden administration.

A recent study by Nathan Herrmann at UT Austin showed that during White’s broken-windows period, greater exposure to SEC enforcement significantly reduced the incidence of major accounting fraud. So although Atkins’ strategy aims to reduce the most severe misconduct, pulling back on minor incidents may actually permit large-scale accounting fraud to occur at higher rates.

However, Herrmann’s study doesn’t reflect on the extent to which a broken-windows approach imposes broader compliance and transactions costs that outweigh the benefits of reduced fraud.

IRS’s Declining Capacity

In contrast to the SEC’s purposeful recalibration, the erosion of IRS enforcement appears less strategic and more destabilizing. Having seven different commissioners in less than a year creates a level of instability that makes it nearly impossible to execute a coherent enforcement philosophy.

The IRS also has faced more than a decade of declining staffing and budget authority. While the Inflation Reduction Act briefly increased funding, ongoing political efforts to claw back those resources have left the agency unable to rebuild its core enforcement infrastructure.

This decline has real fiscal consequences. The most recent estimate of the federal tax gap—the amount of legally owed tax revenue that goes uncollected—exceeds $600 billion in 2022, roughly 10% of the federal budget and comparable to annual Medicaid spending.

In an era of rising federal deficits, even modest improvements in enforcement would generate meaningful revenue offsets. Yet the administration doesn’t appear to have a guiding philosophy for tax administration beyond simple retrenchment, despite that weakened enforcement disproportionately benefits noncompliant taxpayers and shifts the burden onto compliant individuals and businesses.

Some economic arguments caution against high levels of tax enforcement on the grounds that tax collection is ultimately a transfer rather than a net social gain. But those arguments apply at the margin when enforcement is pushed to costly extremes—not when an agency is struggling to perform essential functions. Today’s IRS is far from over-enforcing; it is under-resourced to a degree that threatens the integrity and fairness of the tax system.

Continuing Duty

The shifting enforcement landscape across the SEC and IRS presents a complex mix of risks and opportunities for financial professionals and the companies they advise.

For audit and accounting practitioners, the SEC’s decline in case volume shouldn’t be taken as a relaxation of standards. Although the agency is devoting fewer resources to technical violations, it’s simultaneously focusing on the most consequential forms of misconduct.

Cases involving accounting fraud, market manipulation, and other clear-cut violations remain a high priority, and the penalties for individuals involved in these schemes remain severe. Firms must therefore continue investing in strong internal controls, robust governance, and careful documentation.

Even though IRS enforcement is expected to decline, tax professionals must resist any temptation to equate reduced audit rates with reduced compliance obligations. The tax gap is already enormous, and future administrations facing fiscal pressure may seek to recoup lost revenue by increasing enforcement or revisiting prior-year filings.

Accountants and tax advisers have a continuing duty to guide clients toward positions that are legally defensible and well supported, not merely unlikely to be examined.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Andrew Belnap is an assistant professor of accounting at the McCombs School of Business at the University of Texas at Austin.

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