President-elect Donald Trump has called for yanking significant funding from the IRS. In response, Treasury Deputy Secretary Wally Adeyemo recently predicted that, if the cuts go through, “there would be 6,000 fewer audits of wealthy individuals and 2,000 fewer audits of large corporations, and the agency would have to go on a hiring freeze.” Will this mean a “Wild West” for businesses and their tax advisers?

“The DOGE [Trump’s planned Department of Government Efficiency] and Trump’s stated desire to cut funds that were directed to the IRS under Biden’s Inflation Reduction Act are big topics — but IRS funding, or cuts, are always tied to politics,” according to Antonio Ribeira, principal-in-charge of the Holmdel office of HBK, a regional accounting, consulting and service firm.

Under President Joe Biden’s watch, some $80 billion in additional funding was pledged to the IRS — although congressional squabbles initially reduced that pot by at least $20 billion. During Trump’s campaign, he pledged to rescind all unspent funds from the Inflation Reduction Act, including billions of dollars earmarked for increased enforcement by the IRS.

“Claims like that make for a good sound bite but often miss the fact that the IRS plays a huge role in reducing deficit by enforcing laws,” Ribeira cautioned. “Around mid-December, for example, the IRS announced that it recovered $4.7 billion in back taxes and proceeds from a variety of crimes thanks to the funds the agency already received from the Inflation Reduction Act.”

He added that, according to Congressional Budget Office estimates, “For every $1 the IRS spends on enforcement activities, it brings in $5 to $9 of increased revenues. So, calls for defunding the IRS may lead to a bump in polling, but if Trump and the Republicans want to extend the Tax Cuts and Jobs Act provisions while reducing the federal budget deficit, they’re going to have to maintain IRS staffing levels, and look to cut the fat elsewhere. There’s no getting around the fact the cutting funding will lead to fewer audits.”

Ribeira believes that some “big fish” targets, like complex returns filed by multinational corporations, could be off the hook if the IRS gets gutted.

“These multinational returns often reflect expensive transfer pricing, R&D credits and other complicated issues that are less likely to be addressed with a smaller IRS,” he said. “The result could be less tax revenue and more deficits.”

But critics of the increased funding point to some reports, like one issued in August by the U.S. Treasury, indicating that even with more money, the IRS has been gunning for low-hanging fruit — like small- and medium-sized business owners.

Titled, “The IRS Has Made Limited Progress Developing the Methodology to Comply With the Treasury Directive to Not Increase the Audit Rate for Taxpayers With Incomes Below $400,000 Due to Planning and Implementation Challenges,” the report noted that “examinations of taxpayers reporting TPI [Total Positive Income] under $400,000 consistently accounted for more than 90 percent of total examinations from FYs 2019 through 2023.”

The report also detailed how “examinations of taxpayers reporting TPI under $400,000 accounted for 95 percent of total examinations in FYs 2019 to 2021 and 93 percent and 91 percent in FYs 2022 and 2023, respectively.”

Regardless of the outcome on funding, though, Ribeira says businesses and individuals should not play IRS roulette. “As professional advisors, our focus should always remain on planning and compliance,” he said. “Even if the IRS receives less funding, it doesn’t reduce your chances of being audited to zero. Taking an overly aggressive or outright fraudulent tax stance is wrong. It may yield short-term benefits, but the client risks long-term monetary penalties, while the advisory firm risks its reputation. It’s far better to work closely with an ethical advisor on proactive tax strategies that utilize legitimate credit or deduction planning. You’ll sleep better at night. And probably save more money in the long run.”

Not a good idea?

Another expert agreed that slashing IRS’ funds could backfire.

“If President Trump and the Congress really want to claw back money from the IRS, they can do so, even though that may not be a good idea in the long run,” noted Bill McDevitt, a shareholder of WilkinGuttenplan and director of the accounting and advisory firm’s tax department. “The IRS collected nearly $5 trillion during fiscal year 2023. The money collected is necessary to fund essential services like defense, social security, Medicare, etc.”

In addition to the $5 trillion collected, there are significant amounts actually due but uncollected. According to the IRS, the estimated annual net “tax gap” – or difference between taxes owed but never likely to be recovered through enforcement or other late payments – for the most recent tax year (2022) is $606 billion.

But “the fact that the IRS may be understaffed doesn’t mean CPAs and their clients can go wild with their tax return positions,” McDevitt warned. “We tell clients they must have a supportable position.”

[T]he fact that the IRS may be understaffed doesn’t mean CPAs and their clients can go wild with their tax return positions.
– Bill McDevitt, WilkinGuttenplan

He pointed out, however, that to operate fairly and efficiently, the IRS would need a complete overhaul. “Right now, most of the fixes that are being proposed, like new software, are just band-aids on antiquated systems,” McDevitt explained. “Ideally, the IRS should be restructured into three tiers: one division would focus on simple returns for businesses and individuals. Basically, wages, revenues, and expenses would be reported to the government and processed by the IRS. Filing your simple tax return should be as easy as dealing with your bank or credit card statement. The second tier would focus on complex business and individual returns. That tier would be staffed by highly trained agents who can wade through more complex tax issues. The third branch would focus on multinational and other very large businesses. This kind of structure could lead to greater efficiency and fewer complaints from the public.”

But does he think that will happen?

“Unfortunately, it’s a long shot,” sighed McDevitt. “All too often, the IRS becomes a pawn in political football, so radical but necessary change like this is not likely anytime soon. In the meantime, we will continue to provide clients with timely advice that seeks to minimize their tax burden while adhering to applicable laws and regulations.”

Phillip Goldstein, managing member of the accounting and advisory firm Goldstein Lieberman & Co. LLC, thinks it’s “very likely” that IRS funding cuts are in the cards — and they may affect the IRS enforcement abilities in future years.

“I believe that there may be less corporate audits and those audits will become more selective in nature and scope,” he detailed. “CPAs can prepare by educating themselves and their clients so their clients stay out of harm’s way from the IRS. Obviously, CPAs and their clients are used to tax laws and regulations changing, as they change every year. The best way for any individual and/or company to prepare is to hire the best CPAs and engage a high-quality CPA firm that is knowledgeable about the new laws and regulations.”

Asked if a weakened IRS means CPAs should be more aggressive in their tax positions, Goldstein responded, “It depends on the client and the CPA firm’s interpretation of the tax law”

“The best CPAs are always looking for ways to assist their clients in saving tax dollars. To accomplish this, the best CPAs have the ability to research various ways to look at the tax laws and figure out how to use them to their clients’ advantage “

AI overhaul

Under one provision of the Biden administration’s Inflation Reduction Act, some $80 billion was supposed to be funneled to the IRS over a 10-year period. The flood of funds will supposedly enable the agency to, among other things, hire more than 80,000 new agents, many of which would presumably go out into the field and audit more individuals and businesses in search of tax cheats.

Frank Baglieri thinks it’s overkill. “If you hire tens of thousands of IRS agents, it will be years before they’re ready to go out in the field,” said Baglieri, a founding partner and head of the tax group of Murphy Miller & Baglieri LLP, a tax, accounting and business consulting firm. “In the meantime, the IRS will have to pull older, more experienced agents out of the field to train these newbies, leaving the less-experienced agents handling the difficult cases.”

He said a better approach would be to leverage artificial intelligence and institute a targeted audit approach — similar to the way doctors use AI to quickly and effectively evaluate certain medical conditions by comparing X-rays and other scans to a database of information.

“The IRS already has decades and more of historical data on file and access to industry data,” said Baglieri. “Instead of taking a random or scattershot approach to audits, they could train AI to establish algorithms based on industry data and market conditions. For example, a manufacturing company producing product X could have a gross margin of Y and, over the past number of years it falls outside of industry data standards. Alternatively, certain costs may fall outside expectation for the industry. The information can either generate an audit notice and/or move it to an experienced agent to determine if an audit is warranted. The IRS needs a combination of an investment in technology and hiring and training agents. Throwing tens of thousands of bodies as agents will not generate a return on its investment in random audits and tax compliance. ”

Trump has vowed to eliminate much of that funding, which some politicians claim is a giveaway to wealthy individuals and big businesses. But even if Trump is able to kill some or all of the funding, Baglieri doesn’t plan on changing the advice he gives to clients.

“I don’t think the number of audits will decrease, because the IRS already has a lot of agents, created a task force to target wealthy taxpayers, and has already hired more since Biden expanded the agency’s funding,” he said. “In any case, I do not stake out a more or less aggressive position based on the chances of being audited. Our firm always works within the framework of existing tax law. Even if the volume of audits dropped, it would not change the way I advise clients, just because their audit risk may be lower.”

The bigger issue is whether Trump will extend and/or make permanent the provisions of the 2017 Tax Cuts and Jobs Act that are set to expire at the end of 2025, he added. “Many businesses, particularly smaller ones, benefitted greatly from the TCJA. Two provisions that come to mind are Section 199a, also known as the Qualified Business Income deduction; and another is the bonus depreciation rule. These kinds of provisions helped to spur family-owned and other middle market businesses to hire employees, buy equipment, and invest in their enterprise.”