IRS eases off on some audits with retrenchments giving way to AI

As ongoing workforce reductions in the IRS raise questions on its ability to chase tax dodgers and serve honest filers, leadership at the agency is betting on modernized technology to pick up the slack.

While the Trump administration said it's exerting all efforts to ensure the 2025 tax season proceeds as usual, the well-reported wave of layoffs at the federal tax collection agency has reportedly begun to impact tax enforcement efforts, particularly for corporations and high-income individuals.

“We have seen agents just disappear from cases that we’re in the middle of, and I don’t know what’s going to happen,” Kathy Pakenham, co-head of the tax controversy practice at law firm Vinson & Elkins, told the Wall Street Journal. “We have seen like a switch flipping in the number of audits that are being started.”

The IRS has cut 7 percent of its workforce, primarily from its enforcement staff, with more reductions expected. While Treasury Secretary Scott Bessent has not outlined specific targets, former IRS officials anticipate thousands more downsizing. The agency’s latest strategy involves delaying some taxpayer service cuts while prioritizing a review of its technology modernization efforts.

Workforce reductions and realignment

So far, the IRS has already dismissed 7,400 probationary employees, including over 1,000 from the large-business and international division that handles complex audits. An additional 4,700 employees accepted a deferred-resignation offer. Some of those removed are being reinstated through legal challenges, though their future roles remain uncertain.

Barry Johnson, a former head of the IRS’s research-and-analytics division, questioned the move. “That’s just money being thrown away,” he said to the Journal. “It seemed counterproductive to me to lose staff we worked so hard to recruit and bring on.”

The workforce cuts align with broader efforts by the Trump administration to restructure federal agencies. A person familiar with IRS plans told Reuters on Friday that the agency is considering eliminating 20 percent to 25 percent of its 100,000 employees. The official, speaking anonymously, said there is no predetermined reduction target but noted an opportunity to “realign the workforce to those new ways of doing business.”

The IRS overhaul follows a years-long political tug-of-war over tax enforcement funding. The 2022 Inflation Reduction Act under Former President Joe Biden allocated $80 billion over a decade to drive modernization at the agency and beef up its enforcement. But Republican lawmakers have argued that the original funding plan would have allowed the agency to harass taxpayers, prompting subsequent measures to scale that funding back significantly.

A pivot in tech strategy

As the IRS reconfigures its workforce, it is also taking a “strategic pause” in its technology modernization investments to reassess its long-term approach. According to Reuters, the review includes evaluating artificial intelligence applications in tax collection and customer service, while taking a hard look at previously implemented initiatives including the free Direct File system that was implemented during the Biden administration.

The Biden administration previously estimated that technology-driven IRS improvements could generate $561 billion in new revenue over a decade.

Speaking for the administration, one Treasury official said it viewed tax compliance as critical, but Biden's expansion had left the agency's enforcement division beyond reason. 

For his part, Bessent has repeatedly emphasized the possibilities of "the great AI revolution" in streamlining IRS operations.

“We are doing a big review,” he said in an NBC interview. “I have three priorities for the IRS: collections, privacy and customer service. And we’ll see what level is needed to prioritize all those.”

The IRS has been investing in technology upgrades, including automated scanning for paper tax returns and AI-powered customer assistance. However, the shift away from direct staffing investments has raised concerns about maintaining enforcement levels.