US President Donald Trump has made good on his promises to reduce federal government spending through an immediate recruitment freeze, including hires at the Internal Revenue Service (IRS), which collects 96% of the government’s revenue.
The administration then went on to dismiss 3,500 IRS staff in mid-February, with Kevin Hassett, director of the National Economic Council, saying: ‘Our objective is to make sure that the employees … are being productive and effective.’ Hassett added there are ‘more than 100,000 people working to collect taxes, and not all of them are fully occupied. He stressed that more job losses will follow, ‘especially as we improve the IT at the IRS’.
‘We’re going to see a massive uptick in money laundering and evasion’
Dangerous
Concerns have been raised. Speaking to AB, Everett Stern, the American whistleblower whose disclosures led to HSBC being fined US$1.9bn in 2012 for money laundering and fraud, says the staffing reductions could harm the ability of the IRS to detect and prevent money laundering and tax evasion.
‘It’s very dangerous,’ he warns. ‘IRS capabilities are being stripped away. It’s one of the ultimate investigative bodies and intelligence gatherers for tax evasion. They’re getting rid of seasoned investigators with years of experience in the criminal division. They are getting new employees who don’t know what they’re doing. It’s a recipe for disaster. I think we’re going to see a massive uptick in money laundering and tax evasion.’
Nikole Flax, tax controversy and regulatory services practice principal for PwC US, and a former IRS executive, says those who have been let go are recent enforcement hires. That means ongoing tax cases, assessment filings, appeals and prefiling agreements undertaken by them will be immediately affected and subject to delay. There will be ‘some significant pain’ for the taxpayers involved, she says.
The American Institute of Certified Public Accountants reports that the 3,500 job losses were focused on the small business and self-employed section of the IRS.
‘It will be much harder to blow the whistle on corruption’
Anti-corruption blow
The Trump administration also fired the US Treasury inspector general, while Doug O’Donnell has resigned as acting director general of the IRS. Since inauguration on 20 January, Trump has fired a slew of inspectors general (who receive and assess whistleblowing complaints about wrongdoing in their departments) from federal government departments and agencies, declaring he will replace them with ‘good people’.
‘It will be much harder to blow the whistle’ on discrimination, harassment, ‘bad apples’ and corruption in the IRS and elsewhere, Stern says. ‘It’s paradoxical what the administration is trying to do. They say they are going to rid the government of corruption, but the inspectors general investigate corruption, and they are the people who they are getting rid of. These actions will have an immediate and opposite effect.’
IRS targeted
The memorandum released on Trump’s first day in office singled out the IRS for personnel restrictions. While other parts of the federal government face a three-month freeze pending a report from the director of the Office of Management and Budget (OMB), the IRS has additional hurdles to clear before taking on new staff. Scott Bessent, the new Treasury secretary, can lift IRS restrictions only after consulting with the OMB director, the Treasury and the leader of the US Department of Government Efficiency, Elon Musk, the world’s richest man and a major US taxpayer.
As for the IRS, it says offers for jobs starting on or before 8 February 2025, will be respected, but those beginning after that date, or with an unconfirmed start date, will be revoked.
Staff cuts will lead to tax scams and cheating becoming more widespread
The actions reverse the expansion of the IRS under the previous president, Joe Biden. According to the agency’s 2023 annual report, enforcement staffing was to rise from 33,183 full-time equivalents (out of a total headcount of 82,990) to 37,004 in the 2025 financial year.
The aim of the Biden expansion was ‘to ensure large corporations, complex partnerships and high-income individuals pay the taxes they owe’, with cuts forcing a return ‘to low audit rates for high-end taxpayers’ and tax scams and cheating becoming more widespread. The Trump contraction is a real risk, according to another IRS paper, which points out that 18% of IRS employees are currently eligible for retirement and another 37% will be eligible within the next five years.
Hefty hit
Former IRS commissioner Charles Rettig says: ‘Every facet of IRS operations will be significantly impacted by the current hiring freeze … It is difficult to deliver a private sector experience with so much uncertainty in current and future operations.’
Moreover, the cuts come during the official tax filing season, which opened on 27 January and closes on 15 April, when more than 140 million individual returns for the 2024 tax year are expected. The agency stresses it has made investments in facilitating returns to reduce the need for assistance.
‘The indiscriminate firings are a recipe for economic disaster’
Doreen Greenwald, national president of the National Treasury Employees Union, however, calls the ‘indiscriminate firings of IRS employees … a recipe for economic disaster’. She points out: ‘When taxpayers expect prompt customer service and smooth processing of their tax returns, the administration has chosen to decimate the whole operation by sending dedicated civil servants to the unemployment lines.’
One potential professional home for former or would-be IRS staff could be the planned External Revenue Service (ERS) touted by Trump in his election campaign to collect revenue from non-American or trade-related sources. This idea was also mentioned in an America First Trade Policy paper issued in January. It ordered Bessent, the commerce secretary and the homeland security secretary to investigate the feasibility of establishing the ERS and recommend the best methods for building such an agency ‘to collect tariffs, duties and other foreign trade-related revenues’.
As yet, ERS staffing levels are unknown, but its projected work is currently undertaken by US Customs and Border Protection, with the Treasury responsible overall.
