The IRS Shrank. Will That Lead to More Tax Cheating?

0:05Tomorrow, your taxes are due in the United States. It's a task that most people generally hate, but love to complain about online. Let me tell you something. I just paid my taxes today, and never before in my life have I ever wanted to commit tax fraud as badly as I do right now. I went and paid my taxes today. I'm going to cry. And the agency in charge of collecting these taxes, the Internal Revenue Service, isn't very popular either. Today the IRS went into my bank account and took$700 from me. How do you actually do taxes? The IRS literally will, like, they know exactly on the penny how much I made.

0:53They can't send me a paper with just how much I owe. But taxes are important. Your income taxes, along with all the other money the government collects, fund most of the federal budget. These days, though, the IRS is pretty battered. There are fewer people doing tax enforcement now. It's the very public shrinking of the IRS that we've seen over the past year. That's our colleague Richard Rubin. He covers tax policy for The Wall Street Journal. We know that the IRS has fewer people, particularly on auditors, revenue agents, the people who do the civil tax enforcement. There are fewer of them than there were a year ago, you know, 15 months ago when the Trump administration took office.

1:41And with such a shrunken down IRS. People are feeling like it might be easier to get away with things than they used to. Tax lawyers saw that directly. They saw cases get dropped. They saw cases get passed between agents. And taxpayers, you know, read the news and see that, you know, there's thousands fewer people doing enforcement at the IRS. There's clearly a perception building that it may be easier to cheat, to skirt, to cut corners than it used to be a year or two ago.

2:13Welcome to The Journal, our show about money, business and power. I'm Jessica Mendoza. It's Tuesday, April 14th.

2:26Coming up on the show, will reduced tax enforcement lead to more cheating?

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3:43Since the IRS has shrunk, I wanted to ask Rich, why? Why would the government make such huge cuts to the agency that receives its main source of revenue? Rich started with what the IRS actually does. The most basic, of course, is that it collects taxes. That used to involve a lot of paperwork. But since the 1990s, the agency has needed fewer and fewer people for that task because so much of it has been automated. Back then, there was very minimal e-filing. In the 90s, people would go and line up at the post office, and you'd hand off your return to the person standing outside the post office, and there was this rush to physically mail things on April 15th.

4:27Here's an ad that shows just how many people it took to process a paper return back then. The IRS is currently testing for seasonal data transcribers, tax examiners, and clerks. You can receive paid training 10 % bonus for evening shifts. And so that's the biggest change of what the IRS looks like now as opposed to then.

4:49The other thing the IRS does is enforcement for when people maybe don't pay their taxes. The agency does this in a few different ways. Can you just walk me through what are the three things that the IRS does when it comes to enforcement? Yeah, the three main buckets would be audits, collections, and criminal. Audits, collections, and criminal investigations. Audits are when the IRS needs to verify documentation on a tax return. Like if a business says it received a million dollars, but the paperwork doesn't match. Or when they check whether you actually qualified for that tax break you claimed.

5:25You're going to be looking for some evidence of those credit card transactions and the cash that makes up the difference. You're going to be looking for documents that back up the mileage that the business owner drove, the equipment that they purchased, all those kinds of things. The audit is, did you do this right? Did you follow the law? Collections are called in when someone owes money to the IRS. Usually, the agency starts by sending letters, but it'll also send revenue officers to businesses to collect what they owe. And then there's arguably the most exciting job in the IRS, IRS Criminal Investigations, or the IRSCI, which employs special agents to investigate crimes like tax fraud.

6:10Here's a recruiting video from 2023. You could be doing surveillance one day. You could be doing a search warrant, and you just won't get that as an accountant. They are federal police officers in the truest sense. So they are people with guns. Those people are, they're highly trained. They're like a cross between police officers and nerds. Are these like the people who caught Al Capone? Yeah, they caught Al Capone. These are the agents who go after money laundering, transnational narco-terrorists. It's these criminal special agents who have guns because they're often going to arrest dangerous people who are not just committing tax fraud, but they're committing tax fraud along with drug crimes or whatever else.

6:59How much money is brought in through this type of enforcement? You know, the IRS going after money that isn't necessarily handed over voluntarily. Oh, so this is actually really interesting. If you look at the data about what enforcement actually does, It's really just adding, you know,$80,$90 billion a year on top of what people just pay. That's small potatoes in the grand scheme of tax collections. But the threat of enforcement keeps people honest. And so how much of a priority would you say is enforcement to the IRS and to the federal government broadly? So this has gone through boom and bust cycles, tax enforcement.

7:42Those cycles are often fueled by, on the one hand, public outrage against tax dodging, and then on the other, public frustration with aggressive enforcement.

7:55Republicans often see it as an example of government overreach, while Democrats often see it as a necessary part of effective governance. Like in 2022, when Joe Biden was president, he made tax enforcement a priority, getting Congress to invest$80 billion in the agency. Now President Biden is trying to change that with his infrastructure plan, asking for$80 billion to help the IRS close loopholes and crack down on tax cheats. And so I think there's been this sort of steady cycle of it mattering to people in power and then it kind of retrenching a little bit. And we're right now in one of those retrenching cycles.

8:35President Trump has never been a big fan of the IRS, even before he came into office. Trump has complained about his own audits. That was both before he was president, and he had a business in those audits, and his tax returns have been written about extensively. And also, while he was president, there's a mandatory audit of presidents. And he's also, at the same time, suing the IRS for a contractor's disclosure of his tax returns. So it's like a very convoluted kind of relationship, and he's still in charge of the IRS. Now, in his second term, as Trump has tried to shrink the size of the federal government, the IRS became one of his administration's main targets.

9:17On day one, I immediately halted the hiring of any new IRS agents. You know, they hired... Some of the staff he didn't cut were shifted away from white-collar crimes to focus more on immigration enforcement. Maybe we'll move him to the border.

9:34I think we're going to move him to the border.

9:40So in the grand scheme of things, would you say that the IRS has been hit harder in this administration than it has been in sort of the more recent turns? Oh, yeah. I mean, headcount isn't the absolute perfect measure, but it's one of the best ones that we have over time. And the IRS headcount is now around 70 ,000. That's 30 ,000 fewer employees than it had when Biden left office. And they want to reduce it another 1 ,000 or two. and it's sudden. We have a, we can't show charts on a podcast, but, you know, you see this steady uptick of IRS employees and then it just drops in 2025. So yeah, it's a sudden reversal unlike what we've seen.

10:22And in the face of a beleaguered IRS, some are seeing an opportunity to cheat. That's next. K-pop demon hunters Saja Boy's Breakfast Meal and Huntrick's meal have just dropped at McDonald's. They're calling this a battle for the fans. What do you say to that, Rumi? It's not a battle. So glad the Saja boys could take breakfast and give our meal the rest of the day. It is an honor to share. No, it's our honor. It is our larger honor. No, really, stop. You can really feel the respect in this battle. Pick a meal to pick a side. Ba-da-ba-ba-ba. And participate in McDonald's while supplies last.

11:08The Trump administration says it's trying to make the IRS more effective and efficient. The administration has really tried to keep the focus of the IRS and where they've protected it somewhat on the service side on making sure that returns get processed, refunds go out, people can get phone calls answered. That's been more of the priority. And enforcement is still happening. The IRS said that total enforcement revenue was up 12 % through the first five months of fiscal 2026. The agency also initiated more audits of large corporations and opened more criminal investigations last year than in 2024.

11:47One way that the IRS under Trump is trying to do more with less is by focusing on technological upgrades, especially AI, for things like supporting IRS employees on the back end. The easier it is for a revenue agent to pull up past year's returns, comparable company's returns, any sort of information they can get. The easier you make someone's job, the more efficient that's going to be. And sometimes the IRS is bureaucratic and cumbersome, right? So the more you can cut, there's some real benefits to be gained from cutting through some of that. The idea being that you could kind of do with fewer people sort of the same amount of work but with technology helping it out, basically.

12:31Yeah, and that's the basic idea is that you can approximate the same level of work that you could get with poor people with fewer people. Last month, the IRS's chief executive, Frank Bisignano, told the congressional committee that the agency's efforts to move more processes online has been paying off. And a large amount of Americans access their data online and would prefer to do that. We've invested a lot. We're seeing the returns this year. I think we'll see much better returns in 27. There are also plans to use AI to help in the enforcement of tax law. They've got AI that they're starting to incorporate that's helping them be more efficient in deciding which cases to select for audit or for criminal investigations.

13:16But with 30 ,000 fewer employees, Rich says there will be reduced tax enforcement. In fact, we're already seeing it. Audits of people with at least$10 million in income dropped 9 % last year. And they're on track to decline another 39 % this year. There's just fewer people around. We've seen audits of really high income people drop over the past year. We've seen partnerships, complex hedge funds, private equity firms, the administration and the IRS a few years ago ramping up scrutiny. And then that's a cause. And so we know that there's like fewer people looking. In fiscal 2025, the IRS collected less direct revenue from audits and appeals than in any year since at least 2012.

14:05Though the money can arrive years after the audits start. And less enforcement could create problems in the future. The IRS workforce reduction so far would cut an estimated$46 billion in federal spending over the next decade and also reduce revenue collections by$643 billion. That's according to the Budget Lab at Yale, a nonpartisan center run by former Biden officials. And the Trump administration's IRS budget for 2027 proposes to cut nearly 2 ,000 more staffers. That same budget acknowledges these cuts will reduce revenue for the country. The administration's budget literally says, if you cut enforcement spending, there will be missed opportunities for the United States and lost revenue.

14:51It lays out the exact sort of return on investment from the government perspective, return on investment for tax enforcement that every IRS commissioner I've ever covered has talked about. And then they do that and say, and we're going to cut it. With reduced enforcement, what have you heard from people you talked to about the risk that tax crimes will be missed? So there's definite risk that both tax crimes and civil tax violations will be missed. There's no doubt that the fewer people in the system to look at things, the less that they will do. Tax lawyers that Rich interviewed also say they see more taxpayers saying they're eager to cut corners or cheat.

15:34One lawyer told him, quote, there's seemingly this mentality building, which is the IRS isn't going to catch me. From the tax lawyers that I've talked to, the retrenchment at the IRS is creating a mindset among some taxpayers that getting away with things is going to be easier than it's been. Another tax lawyer Rich spoke to describes it as defunding the police. And so if you're sort of the average person who just pays your income tax, you know, especially the ones who get it out of a W-2, how would this development with the IRS affect them? Like, why should they care? people I think want a tax system that is fairly and evenly enforced right so there are all sorts of laws and norms built into the way that we do tax enforcement trying to have even-handed tax enforcement that holds high-income people middle-income people and low-income people accountable across the system so that people feel confident that everyone is paying is helps sort of that norm of compliance.

16:43We have a very strong norm of people wanting to do the right thing. Right, right. You're like, if I'm paying my taxes, I want everybody else to be paying their taxes. Right, right. And they find the law confusing and difficult and stressful to deal with. But I think by and large, people want to comply and want, however defined, a fair system.

17:12Oh, and by the way, if you're worried about your federal tax refund, don't. This IRS overhaul probably won't affect it. That's all for today, Tuesday, April 14th. The Journal is a co-production of Spotify and The Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts. We're out every weekday afternoon. Thanks for listening. See you tomorrow. The Future of Everything is The Wall Street Journal's flagship live event, returning to New York City May 4th through 5th. Be there as CEOs, policymakers, and innovators sit down with our journalists to answer the most pressing questions of the day.

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