Quick Takeaways

• Major IRS shakeups: Both the Commissioner and Deputy Commissioner have resigned, along with thousands of new staff being let go, creating widespread uncertainty.
• Audit activity may dip temporarily, but don’t get complacent. The IRS still has tools to enforce compliance.
• The IRS is using data analytics and correspondence audits to catch suspicious returns, even with fewer staff.
• Taxpayers should remain honest and diligent. This is not the time to take shortcuts or guess on deductions.
• Audits often lag by 2-3 years, so current behavior can impact future scrutiny, plan your tax strategies accordingly.

Q: Norman, we’ve been hearing about major shakeups at the IRS. What’s going on with enforcement lately?

Norman: The IRS is going through a rough patch. Between late January and mid-April, the Commissioner, Deputy Commissioner, and Chief Information Officer all resigned, plus 7,000 probationary staff (less than 12 months on the job) were all fired. This has led to a lot of questions about how well the IRS can still function and whether audits will still be a thing.

The resignation of the IRS Commissioner is a big deal since this person is in charge of not only running the agency but also planning its future. When the Commissioner resigned, the Deputy Commissioner became the acting Commissioner and before anyone could be named permanently in the role, the Deputy Commissioner resigned, adding even more disruption and leaving the IRS without key leadership.

The firing of 7,000 probationary staff, who haven't been at the job for more than a year, raises concerns about the IRS's ability to handle its workload. Although technically these are entry-level employees, many are experienced in their fields outside of the IRS and their sudden dismissal will cause delays and changes in multiple functions at the agency.

Q: That’s a huge change. How might IRS layoffs and other disruptions affect tax compliance and tax strategies going forward?

Norman: One potential impact is there might be fewer tax return audits, otherwise known as tax exams. Audits are a method of enforcing and measuring compliance with tax laws. They are also one means of uncovering tax fraud. With fewer IRS employees, the number of audits may drop.

Some might think it's a good time to get aggressive with their tax positions and deductions because of the IRS's troubles. But filing super aggressive tax returns is a serious action with heavy penalties and possible criminal charges if positions seem fraudulent, i.e. thought out ahead of time and done deliberately.

Once you file an original return, you can't change the content. Yes, an amended return can be filed but these are only updates, the original return positions stay unchanged. If those positions are found to be fraudulent or frivolous (done without merit), you will face severe consequences, even if you've filed an amended return.

Reminder, audits usually happen two years after the tax year, so a 2024 return might not be looked at until 2026 or even early 2027, and no one knows what the level of IRS staffing will be that far into the future.

Q: With that in mind, how is the IRS planning to maintain oversight and enforce compliance?

Norman: Despite the staffing cuts and holes in leadership, the IRS has data mining and statistical databases to check the validity of tax returns. These tools can spot suspicious returns without human involvement, ensuring some level of oversight even without IRS employee interactions.

Besides regular audits, the IRS also does correspondence audits, where they send letters asking for proof of certain claims, like big charitable deductions or unusual travel expenses from self-employment. This allows the IRS to keep an eye on compliance even with fewer employees and without sending staff out to the taxpayer’s, or their representative’s, location.

Q: So, bottom line—what tax strategies should taxpayers be implementing right now amid IRS layoffs and uncertainty?

Norman: Even though the IRS is facing major challenges, it's still focused on maintaining tax compliance through technology and strategic audits. Taxpayers should be careful and avoid taking extreme positions that could lead to scrutiny and severe penalties. Honesty and diligence in tax filing are still important, and despite the IRS’s struggles, it will continue to enforce tax laws and ensure tax administration. We don’t yet know exactly what that looks like, but we will see where the dust settles as this all plays out.

If you have questions or ongoing IRS challenges, we will be happy to connect with you. Please contact our Tax Services Team whenever you are ready.