According to Elon Musk, the mission of the Department of Government Efficiency is to save taxpayers’ money and to reduce the national debt. Clearly, we have heard numerous ideological messages about its successes, but is DOGE making substantive progress in fulfilling its mission?
As a tax professional and an instructor in the California State University, Northridge, masters of taxation program, I live in the world of taxation and tax policy. Over the past 30 years, I have seen a steady erosion in the IRS’ ability to fulfill its mission. Years of budget cuts and headcount reductions have seriously impaired the IRS’ ability to audit the complex returns of high-wealth individuals, multinational corporations and Wall Street entities. Consequently, the IRS shifted its audit approach to examining simpler returns.
Between 2010 and 2020, there was a 35% reduction in IRS audits of corporations. In 2021, a firm called Calcbench analyzed the financial statements of 467 of the S&P 500 companies. In particular, Calcbench looked to see how much these companies’ 2020 income tax expense was reduced because the statute of limitations had expired for prior year returns in which aggressive positions were claimed. Those 467 corporations reported additional profits of approximately $235 billion in 2020 because the tax authorities did not overturn aggressive tax return positions and are forever precluded from doing so because the statute of limitations has expired.
Much of the tax avoidance is conducted through the use of complex transactions that take advantage of loopholes and aggressive interpretations of tax law. The IRS lacked the capacity to properly audit these taxpayers and administer the tax law.
During Joe Biden’s presidency, Congress authorized $80 billion to rebuild the IRS. Part of those funds were dedicated to increasing audit activities of high-wealth individuals, large corporations and partnerships. As part of that rebuilding process, the IRS recently hired an impressive team of tax professionals with special expertise predominantly from large accounting firms.
On Feb. 20, many of them received an email from the IRS stating that their employment at the IRS “is not in the public interest.” In order to avoid having to pay severance, these employees were fired for cause even though they did nothing wrong.
Putting this in perspective, these newly hired IRS employees are among the agency’s most talented IRS agents. Their focus was to audit large complicated tax returns with a high likelihood of uncovering significant tax deficiencies.
The Calcbench analysis is merely a sample of 467 of America’s largest companies. The sample population understated their taxes by a quarter trillion dollars annually. When the sample is extrapolated to the corporate universe, the total understatement is much higher. While the newly hired IRS agents probably could not be expected to collect this entire amount, the old adage is that for every dollar the IRS spends on enforcement, it collects at least $2 in additional tax. A recent study by the National Bureau of Economic Research shows that, when the IRS audits people in the top 10% of adjusted gross income, the IRS collects $12 for every dollar spent on auditing those individuals. I suspect that the newly hired agents were likely to do even better than that.
I know many people who worked as tax specialists in public accounting who were recently hired by the IRS. Some were my students; others are former colleagues. All have careers that are based on strong ethical standards. Each of them possesses a specialized skill in some technical area that has a high potential for abuse by wealthy sophisticated taxpayers or large corporations.
So, if DOGE’s mission is to save taxpayers’ money and to reduce the national debt, why would they fire IRS agents who are likely to generate tax revenue many multiples of their cost? Why isn’t their continued IRS employment in the public’s best interest?
On the day the IRS firings were announced, I met with one of my clients who is the patriarch of a wealthy family with extensive business interests. He reacted to the news of the IRS firings with glee. At lunch he said, “Well, this means we can get much more aggressive with our tax planning.” Indeed, when the cat’s away, the mice will play. Tax compliance by the wealthy and large corporations is likely to take a hit going forward — further exacerbating the deficit and national debt.
Clearly, the taxpayers who will save money are those who pursue aggressive tax strategies. But what about the second part of DOGE’s mission that is supposed to address reducing the national debt?
Jim de Bree is a semi-retired CPA who resides in Valencia.
