Over the past few months, I have concluded that the IRS is clearly imploding. Since biblical times, tax collectors have been hated, so that built-in predisposition undoubtedly makes many sympathetic to cutting IRS resources.
What they forget is that the IRS is an essential component to a functioning government. A huge part of our deficit and national debt problems are revenue related.
Until recently, the IRS generally lacked the resources to effectively audit multinational corporations, high-net-worth individuals and partnerships that are used for aggressive tax avoidance purposes.
When IRS funding was restored during the Biden administration, the IRS realized it would take years to develop its audit capabilities, so it hired experienced tax professionals from large accounting firms and law firms who had the ability to effectively examine complicated returns in which aggressive tax positions were taken.
Based on my conversations with colleagues at large accounting firms and the IRS, once these new IRS agents hit the ground running, they were enormously successful in identifying tax deficiencies.
Furthermore, they were well-organized and were closing out cases with greater speed and efficiency than that of legacy IRS agents.
Then in February, as a result of the Department of Government Efficiency’s actions, most of these new IRS Agents received an e-mail telling them that their employment was no longer in the IRS’ best interest and that they were fired for cause.
Since then, working conditions at the IRS have deteriorated and much of the IRS workforce is seeking employment elsewhere while the government plans on reducing the IRS headcount by up to 40% between now and August.
The IRS now needs to clear its examination backlog. I am aware of situations where, due to recent personnel cuts, the IRS is closing examinations in progress, foregoing proposed assessments. All of these cases involved examinations of high-net-worth individuals and partnerships.
In other words, the IRS is leaving money on the table at a time when the government is struggling with seemingly unmanageable deficits.
Perhaps it is mere coincidence, but worth noting, that the people behind the IRS cuts are also those who were likely targets of increased IRS scrutiny.
Certain taxpayer services are suffering as well.
I have a client whose 2023 e-filed tax return was accepted by the IRS last year, but for some reason, cannot be processed. I called the IRS helpline several times for help but was put on hold and eventually disconnected each time.
My subsequent alternate efforts to communicate with the IRS have proven unsuccessful so far.
In a hearing before the House Appropriations Committee on May 6, Treasury Secretary Scott Bessent testified that the IRS plans to replace its workforce with artificial intelligence, so the layoffs are not expected to interfere with tax collections.
Mr. Bessent stated, “There is nothing that shows historically that by bringing in unseasoned collections agents that it results in more collections or high-end collections. Becoming a high-end IRS collections agent is something that one grows into.”
His statement appears somewhat disingenuous because he knows — or at least should know — that the IRS agents who were fired were not “unseasoned.” Furthermore, a large component of the “seasoned” IRS senior personnel is expected to leave between now and summer’s end.
Over the past two years, the IRS implemented artificial intelligence to assist its agents in examining complex tax returns.
But AI does not replace the personal element of administering taxes.
Over the past half-century, I have been involved in numerous IRS examinations. The bulk of the time spent in those examinations was addressing ambiguity in complex factual situations. The issues were always resolved through the exercise of interpersonal skills by experienced parties.
AI should be used to enhance, rather than replace, those skills. Perhaps years from now AI will develop the requisite interpersonal skills, but what do we do until then?
The tax gap is defined as the difference between the amount of tax that would be paid if everyone paid every penny of tax owed under the law and the amount of tax actually collected.
The IRS has published conflicting data about the magnitude of the tax gap, but in recent years it estimates that gap to be in the range of $400-$700 billion annually.
Perhaps those estimates may be understated.
Closing that gap would clearly reduce both the deficit and the national debt growth rate. Unfortunately, the current course of shrinking the IRS will undoubtedly grow the tax gap.
Jim de Bree is a Valencia resident and CPA who recently completed his 52nd year of providing tax preparation and consulting services.
