In the wake of continuing IRS budget cuts… And the significant loss of its workforce… Is the agency turning into a paper tiger? Since President Trump began his second term in office, IRS funding has declined, and there’s been a sharp drop in personnel. Congress set IRS’s fiscal year 2026 budget at $11.2 billion, 9% less than IRS’s FY25 funding, and House appropriators want to slash it further, to $10.2 billion for FY27. Additionally, the agency has lost over 20% of its workers since Jan. 2025 through voluntary deferred resignations and layoffs, with even more departures expected this year.
IRS’s enforcement arm is feeling the brunt of the cuts. Congress has rescinded most of the Service’s windfall from 2022’s Inflation Reduction Act that was targeted for increased enforcement efforts. And some of the biggest drops in employee head count are from the agency’s examination and collection groups. The Trump administration’s FY27 budget request for IRS includes an 18% cut in enforcement activities and projects fewer than 25,000 total enforcement employees. Also, IRS is experiencing brain drain. Many of the one-in-four enforcement workers who retired or left IRS were experienced agents and managers with deep knowledge. The lost know-how will be hard to replenish with those employees who remain.
How will this impact IRS audits? The overall number of exams will decline. In recent years, the IRS audit rate for individuals was significantly below 1%, and we expect this figure to continue to go down, at least over the next few years. Some filers are escaping the audit anvil because of scarcer audit resources. Two prime examples are high-income individuals and partnerships. The number of IRS audits of individuals with $10 million or more of income and partnerships has fallen from 6,786 and 3,174, respectively, in FY25 to 2,264 and 2,932 in FY26. IRS forecasts even further declines in these audits in FY27.
But this doesn’t mean it’s a tax cheat free-for-all. According to IRS leaders, there will be fewer overall audits, but the exams that are done will be more targeted. Data analytics and artificial intelligence use are increasingly the norm now in IRS’s enforcement arsenal. Data-mining software can sift through taxpayer data, expose suspicious activity and identify cases for audit. IRS is relying on this technology to more precisely identify high-risk noncompliance and to improve efficiency.
A new 1% excise tax applies to U.S. remittance transfers sent abroad. The tax, which kicked in Jan. 1, is paid by the sender on the transfer date and is submitted to IRS semimonthly by the transfer provider. The scope of the rules has changed since this tax was first proposed in the House. In its initial stages, the proposal was aimed at senders who were not U.S. citizens or permanent residents. It evolved through the legislative process and now applies to relevant cash transfers from the U.S. to other countries regardless of whether the sender is a U.S. citizen.
IRS issued proposed regulations on this tax. It is levied only in cases in which the sender provides cash, traveler’s checks, money order, cashier’s check or any other similar physical instrument to the remittance transfer provider. It doesn’t apply to any transfer in which the funds being transferred are withdrawn from most U.S. bank accounts or paid for by a credit or debit card. However, if a sender brings in a personal or business check payable to him or her and asks the remittance provider to cash the check and send the money abroad, then it’s treated as a remittance transfer of cash overseas and hit with the 1% tax. Note that the tax applies to remittances made primarily for personal, family or household purposes and not to business-related transfers made by the sender.
The income tax burden on high-incomers fell for 2023, per IRS statistics. The top 1% of individual filers paid 38.4% of all U.S. federal income taxes… down from 40.43% for 2022. They reported 20.63% of total adjusted gross income. Filers need AGIs of at least $675,602 to earn their way into the top 1% category. The highest 5% paid 59.3% of total income tax and accounted for 36.42% of adjusted gross income. Each filer in this group had an AGI of $272,209 or more. The top 10%, those with AGI of at least $187,608, bore 70.54% of the burden, while bringing in 47.6% of all individuals’ total adjusted gross income for the year. The bottom 50% of filers paid 3.26% of the total federal income tax take. Their share is low because many get substantial tax relief through refundable credits. Filers in this bottom half of all individual taxpayers have AGI below $53,801.
Bad news for IRS on its efforts to curb abusive microcaptive insurance ploys. A court partially strikes down the Service’s regulations on these schemes. In Jan. 2025, IRS published final rules treating certain microcaptive arrangements as listed transactions or transactions of interest. Transactions of interest are schemes that might have the potential for tax avoidance, while listed transactions are presumptively abusive and are tax avoidance moves. Listed transactions have extra reporting requirements and higher penalties. A captive insurance firm challenged the agency’s regulations in court and came out with a partial victory. A district court said that IRS appropriately designated microcaptive schemes as transactions of interest, but exceeded its statutory authority in designating them as listed transactions because there’s no finding that the majority of such schemes are done to avoid or evade federal income taxation (Drake Plastics, Ltd., D.C., Texas).
Waiting for the Revenue Service to reply to your written communication? Don’t expect a quick response. IRS’s policy is to generally respond to taxpayer correspondence within 30 days. In most cases, IRS isn’t meeting this goal, and letters continue to pile up at IRS service centers. For instance, IRS’s inventory of written correspondence at the end of the 2025 filing season was 7.6 million. Compare this with 6.8 million at the end of the 2024 tax return filing season. Additionally, overage correspondence inventory is also higher than in prior years. This is leading to frustration for taxpayers, especially those who get notices from IRS after mailing the requested documentation. And it’s only getting worse. Expect the 7.6 million figure to increase even more by the end of the 2026 filing season.
Tried to call IRS and waited too long on hold? You’re not the only one. The Center for Taxpayer Rights, a nonprofit organization founded by Nina Olson, former IRS national taxpayer advocate, called eight IRS phone lines over 33 days this filing season. Here are some of the results: 37% of the calls ended in disconnects. Average hold times on IRS’s two automated collection services telephone lines were more than an hour. Wait times on IRS’s 1040 line averaged 28 to 38 minutes.