WSJ Your Money Briefing - What Cuts to the IRS Could Mean for Taxpayers

Episode Date: March 19, 2025

A hollowed-out IRS could mean weaker tax enforcement and fewer audits. WSJ tax-policy reporter Richard Rubin joins host Julia Carpenter to explain what taxpayers need to know.  Sign up for the WSJ's free Markets A.M. newsletter.  Learn more about your ad choices. Visit megaphone.fm/adchoices

At Desjardins, we speak business. We speak startup funding and comprehensive game plans. We've mastered made-to-measure growth and expansion advice, and we can talk your ear off about transferring your business when the time comes. Because at Desjardins Business, we speak the same language you do, business. So join the more than 400,000 Canadian entrepreneurs who already count on us, and contact Desjardins today. We'd love to talk business.

Here's your money briefing for Wednesday, March 19th. I'm Julia Carpenter for the Wall Street Journal. Earlier this week, the Trump administration announced planned cuts to the Internal Revenue Service. The IRS has already seen a 7% reduction in staff, a hiring freeze, and a walk back from the Biden era expansion. So what could these new changes mean for taxpayers? Will the IRS be half the size, three quarters of the size? What's it going to look like in a year or two years? And what's that going to look like in a year or two years, and what's that going to mean for this whole tax ecosystem that's out there?

We'll talk with WSJ reporter Richard Rubin about how these cuts could affect audits, enforcement, and more. That's after Secretary Scott Bessent talking about proposed changes to the IRS on Sunday's Meet the Press. These cuts could mean thousands of IRS employees laid off and audits delayed, all of which could have far-reaching effects for American taxpayers. Wall Street Journal reporter Richard Rubin joins me to talk more. Okay, Rich, I have a big question for you. What the heck is happening over at the IRS?

A lot. So this has been an incredibly somewhat chaotic and very busy period at the IRS. Look, this is tax filing season. It's March, it's April. It's the time when the service is the busiest it is receiving everybody's tax returns, getting those phone calls, sending out those refunds. But on top of that, this year, you've got everything that's happening with the new administration coming in and shaking up a whole bunch of things the leadership, the number of employees and like we're seeing it all sorts of other

federal agencies, just the way that work is done. And just to clarify, what's the Trump administration's goal in slashing the workforce here? That's still coming into focus. This Trump administration did at the IRS what it's done elsewhere, which is get rid of probationary employees, people who've been one or two years into the job. And at the IRS, that was really significant because the service had been ramping up hiring under the Biden administration. So it's not that there were just a handful of new people.

There were thousands of new people. The Treasury Department has signaled a couple of things. One is that they expect to replace workers with technology, both on taxpayer service and enforcement, and to reshape how the IRS uses technology, a real leaning on computers as opposed to people at the IRS. And that's a really tall task. And on that note, if there's weaker tax enforcement, does that mean we can expect to see fewer

people being honest about their taxes? And I'm wondering what that means for those of us who are always really spooked every tax season. We comply with the tax law pretty well actually in the US, about 85% compliance voluntarily and another 2% on top of that through enforcement. And there's concern that if you know that the cop is not there with the radar gun, that you're going to speed more. If you know your chances of audit are lower, you might blur the lines a little bit. For people who are wage earners, compliance is really high because

you know that you get your W-2, your wage income is on there, the IRS gets your W-2, and you know that when you send in your tax return, they're going to check to make sure that you reported that income. It's a matching thing that is short of an audit. The areas where you see short of an audit. The areas where you see lack of compliance are areas where the IRIS doesn't have independent information. It's businesses that receive income in cash, business deductions, it's deductions of charitable contributions that maybe you just put down a number and the IRIS doesn't necessarily have independent information about it. It does create that risk that this norm of voluntary compliance could start eroding.

On an individual level, many people are already really familiar with using tech to help at tax time. But you wrote about how with these proposed cuts, the IRS will have to rely more on that. So what kind of ripple effects can we see from that? I mean, the question really is how well this works. So let's take the service side and then the enforcement side. In terms of service, the IRS has been making some steps to improve its technology. This is a kludgy system built on top of a kludgy system. I went to Utah a couple years ago to see their processing center out there and there are still people like taking paper filings, opening them up, circling them with red pens, and then entering the data in the system. So the IRS is trying to get away from that.

And if the IRS can do its correspondence with taxpayers online, like you would expect from your bank, that's not always feasible. I think there's both in terms of the complexity of the system and taxpayers who are not comfortable with technology, there's always going to be some of that. The enforcement side is a little trickier. The case from the Treasury Department is that the IRS can use technology to do audit selection and to manage cases better.

There's still an acknowledgement that you do need skilled forensic accountants to go after the big dollar cases. Those are some of the people they've lost. The question is kind of how much further some of those cuts go. You and our colleague, Ashley, have talked to tax lawyers, taxpayer advocates, former IRS employees, and numerous other professionals. What did they have to say about these proposed cuts? There's a sense of not quite shock but surprise at just how quickly everything

has changed how it went from ramping up the IRS to ramping down the IRS and then the suddenness with which things changed in the past two months, I think is what is been most striking for people. It's sort of a ramping up and then a clipping down and that and this lack of clarity on what comes next. Are we gonna the will the IRS be half the size, three quarters of the size? What's it going to look like in a year or two years?

And what's that going to mean for this whole tech ecosystem that's out there? Totally open-ended question right now and very much up in the air. And I know in your world, this almost goes without saying, but April 15th is just a few weeks away. And I know in your world this almost goes without saying, but April 15th is just a few weeks away. And I know a lot of listeners are probably wondering, what does this mean for the tax prep they've already done or are just now starting to do? So the administration for the most

part, not 100%, but has tried to avoid any service side cuts that would affect the filing season. So largely probationary employees who are on the service side answering calls, opening mail, that kind of thing have not been affected. And there's at least some concern in the tax world that maybe next year won't quite work so well and what that might look like. Looking ahead, what should taxpayers be looking out for? And I'm also wondering, who is the most likely to be impacted by these cuts? In terms of who's most likely to be affected,

I think right now it's the group of people that we're getting audited more. It's corporations, it's high income people. The pressure on those groups has lessened somewhat. Not entirely. The IRS is still doing audits. It's not like the IRS has just vanished, right? corporations as high income people, the pressure on those groups has lessened somewhat. Not entirely. The IRS is still doing audits. It's not like the IRS has just vanished, right?

That's not what's happened. For most people, it may be relatively seamless. If you've got a relatively simple return, you fill it out, you file it, the IRS accepts it automatically, kicks out your refund automatically. That's fine. That may work. The challenge really is going to be what does it look like if you need something from the IRS? If your refund is delayed? If something on your

return doesn't match something else that your employer or somebody submitted? If you're behind in paying and you have to figure out a collections plan and a payment plan with the IRS? Those kinds of things anytime you might need a person at the IRS, whether that's enforcement or service, that might be more challenging going forward, depending on the path that this administration and the Congress decides to take. That's WSJ reporter Richard Rubin. And that's it for your money briefing.

This episode was produced by Ariana Asparu with supervising producer Melanie Roy. I'm Julia Carpenter for The Wall Street Journal. Thanks for listening.