The IRS After January 20

We and our clients will face new challenges in working with the IRS after January 20. Budget cuts will further reduce audit credibility and may result in the loss of key employees and a demoralized IRS workforce. This will have a direct effect on how we do business with the IRS and how much your clients will pay in taxes, as well as a possible reduction in revenue for our country, which has chronic deficits and an unsustainable $36 trillion national debt. 

Budget Cuts 

On Jan. 20, 2025, Republicans will control both houses of Congress and the Presidency. Republican lawmakers have often been hostile to IRS funding, viewing the agency as too intrusive into private matters of businesses and individuals, and potentially hostile to conservative interests, such as years ago when the IRS heavily scrutinized certain exempt organization applications for perceived political reasons. President Biden had boosted IRS funding by $80 billion over 10 years, but this was reduced by $20 billion in the Inflation Reduction Act of 2022. Even before taking control of Congress, in the recent compromise to keep the government from shutting down, Republican lawmakers forced the clawback of another $20 billion in IRS funding. Further cuts may be expected following the theme that the tax law and the IRS need to be “pulled out by their roots,” expressed in recent hearings on IRS abuses in the Republican-controlled House of Representatives.  

Loss of Audit Credibility 

We help our clients comply with the tax law, but other taxpayers with less competent or honest tax advisers or without assistance may be tempted to play the “audit lottery.” We have a self-assessment system of taxation that needs to be backed up by credible audit potential. We currently have $500 billion in unpaid taxes each year with the average taxpayer only being audited once every 200 years. IRS funding cuts will further impair audit credibility. Our clients may resent that we require them to comply with complex tax provisions that are often ignored by others. Honest and compliant clients may have to pay more if other taxpayers do not pay their fair share, or government services will have to be cut back. If not, budget deficits and the national debt will continue to grow.   

Return to the Office Dilemma 

After years of telecommuting since the COVID-19 pandemic, government employees have recently been encouraged to return to the office. This has been more aspirational than actual, with many employees saying that they would rather change jobs and with employers relenting to avoid the loss of critical workers. President-elect Trump has flatly said that he will fire those who do not return to work in the office. This might seem to be a plus for tax practitioners who could interact more easily with IRS employees, but the possible loss of many trained employees in critical positions coupled with the lack of funding and lower morale in a gutted organization could make our work with the IRS more difficult. 

Leadership Change 

IRS Commissioner Danny Werfel was appointed by President Biden and has nearly three years remaining in his term. He has been fairly popular, working to rebuild the IRS after COVID, boost customer service and refocus audits on higher-income individuals. However, Trump wants to take the IRS in a different direction and has nominated Billy Long, a former congressman, real estate broker and auctioneer, to replace Werfel as commissioner. Long has advised clients on tax savings, particularly using the employee retention credit. He is not an attorney or CPA like previous commissioners but is a “certified business and tax adviser,” a little-recognized professional credential. Long has not had experience managing large organizations and will be challenged to run the IRS with its 85,000 employees and an annual budget of around $12 billion.   

While in Congress, Long sponsored the Tax Code Termination Act that would have eliminated the tax code as we know it and shifted to a flat tax as of 2020. This was not enacted, but it shows his interest in radical changes in the tax area. His leadership may shake up the IRS and lead it in a new direction, but with potential rewards come possible risks of lapses in tax administration and dispirited employees. 

Conclusion 

While no one loves the IRS, it is an essential part of government, collecting the revenue that allows for all the expenses of serving citizens. With inadequate funding and leadership changes in direction, the IRS may be less responsive and potentially less reasonable in working with us. We may not want our clients to be audited, but without a credible audit potential, billions of dollars of lost revenue will result in reduced government services, higher national debts and deficits, or higher taxes for our compliant clients. 

TXCPA’s Federal Tax Policy Committee has previously encouraged adequate funding for the IRS, generally focusing on taxpayer service. We should watch carefully to see what action may be needed to maintain an efficient and effective IRS after January 20.