As April 15 looms, the IRS is undergoing a transformation with far more lasting impact for taxpayers and the country as a whole.
The agency is expected to slash thousands of jobs, reducing its workforce 18% to 25% by late May under the Elon Musk-headed Department of Government Efficiency (DOGE) — a move that could reduce federal revenue by $395 billion over the next decade.
Meanwhile, the Republican-controlled House passed a budget resolution in late February cutting taxes by $4.5 trillion through 2034 and calling on committees to partially offset the cost with nearly $2 trillion in cuts.
Analysts estimate that this doubling down on Trump’s 2017 cuts would add $3.6 trillion to the national debt over 10 years, with Americans households in the wealthiest top 5% alone getting half of the benefits.
In the fiscal year 2023, the IRS collected $4.7 trillion, or 96% of federal revenue. In 2024, it’s expected to collect 97%, or roughly 5 trillion — but of that, they’ll miss out on about 14%, or $700 billion.
The vast majority of the uncollected money will come from earners with wages not automatically withheld, “so there’s a lot of scope to manipulate and pay less than their true tax liability … and the vast plurality of this comes from the highest earners, as they’re responsible for the largest share of taxes owed,” said Natasha Sarin, professor of law and finance at the Yale Law School and Yale School of Management, at a Friday, April 11 American Community Media briefing.
Of the $700 billion underpayment, 30% or $200 billion is expected to come from the top 1% of American earners alone.
The IRS’ ability to audit and enforce top-level taxpayers “is what it has historically been lacking most,” said Sarin.
“That type of work requires individual people reading 1000s of pages of corporate tax returns and trying to apply valid partnership law by literally hand-transcribing line items from tax returns,” she explained, “and the first people they got rid of were disproportionately working on those areas of great need.”
While the IRS fired about 7,000 probationary employees in late February, the agency has since given these employees the option to return to their jobs by April 14, the day before the tax filing deadline.
Every extra hour spent by the IRS on auditing high net worth taxpayers, defined as those making at least $5 million a year, generates $4,500 in taxes otherwise uncollected, according to 2013 estimates.
“As you do less enforcement, you lose not just direct dollars, but also these indirect or deterrent dollars, and we’re already seeing fewer dollars paid into the agency,” said Sarin, adding that “we estimate the number could range anywhere from $400 billion to $2.4 trillion of losses over this decade.”
Meanwhile, the average American spends 13 hours and $290 on filing their tax returns each year, constituting a collective $148 billion in out-of-pocket costs in tax prep and software, and 7.1 billion hours costing the economy $316 billion in lost time.
“For people like me who have income that is like subject to withholding, the voluntary tax compliance rate is very, very high,” said Michael Kaercher, deputy director of the NYU Tax Law Center; Former IRS Attorney. “But if you have no reporting like that, you may drop to worse than 50%, so it really turns a system of extraordinarily high compliance to a system that looks much closer to optional compliance.”
While the new IRS cuts will only worsen this compliance and auditing, the timing of the House bill is unclear; while current tax cuts expire in December, Congress is likely to reinstate its debt limit in the same bill as these new cuts.
“Official forecasters don’t know when exactly that date is, but they forecast somewhere in August or September,” said Kaercher.
“Traditionally, you score bills. If you want to cut taxes in year one, you pay for that cut then, and if you want to do an extension in year two, you pay for it then,” he explained.
“With this resolution, they’re using what they’re calling ‘current policy baseline,’ saying ‘Because we already have tax cuts, we’ll assume that they’re permanent and that we don’t pay for extensions,’” Kaercher continued. “That’s a way to make over $3 trillion of that $5 trillion disappear. There’s no policy to it. It’s pure marketing, and it is unprecedented.”
Of the nearly $2 trillion in cuts planned to offset this $5 trillion, roughly $880 billion will come from Medicaid cuts proposed by the House budget resolution — “and the second bucket of very significant spending cuts that the House is considering are through SNAP,” he added. “A lot of the pay for these incredibly generous tax cuts that heavily tilt towards the rich are coming right out of the pockets of the lowest-income people … including undocumented immigrants.”
The Yale Budget Lab estimates that unauthorized immigrants paid $66 billion in federal income and payroll taxes in 2023, two-thirds of which was payroll taxes.
All individual income taxes in 2023 totaled $2.18 trillion, or $6,499 per taxpayer.
On April 8, the IRS and Immigration and Customs Enforcement (ICE) entered an agreement allowing ICE to access private taxpayer information — including home addresses, taxpayer numbers and financial records — to aid in deportation efforts.
This led the IRS to lose its third chief this year with the impending departure, in response to the immigration deal, of Melanie Krause, who had been acting as commissioner for less than six weeks before her announcement.
Richard Prisinzano, director of policy analysis at the Yale Budget Lab, said this will likely lead the many undocumented individuals having taxes withheld through a W-2 “to overpay taxes because they’re afraid to file to get a refund … or they might renegotiate how they’re getting paid toward an under-the-table situation, so there’s no withholding.”
The Budget Lab TBL also estimates that the IRS-ICE agreement could lead to a 0.5% loss in federal income and payroll tax revenue on average, amounting to “$25 billion in 2026 (central range of $12-39 billion) and $313 billion ($147-479 billion) over 2026-35.”
Aravind Boddypalli, senior research associate at the Tax Policy Center, said undocumented federal taxpayers, who are already “ineligible for many government benefits, including Social Security … will likely miss out on benefits like the Child Tax Credit or the Earned Income Tax Credit that help them afford basic needs like groceries, childcare, housing and transportation.”
“When you don’t have a valid taxpayer number, it doesn’t just affect employment but credit access to buy a home, start a business, even to open a bank account,” he continued. “We’re all collectively worse off for it, because the formal economy in which immigrants participate shrinks further. You’re forcing people to participate in the informal economy instead and forcing them to not have bank accounts, to access basic services.”
“It seems to me that this is another avenue to push immigrants, and most taxpaying Americans, into the shadows,” Boddypalli added.
