The IRS is in chaos

WDC NEWS 6 STAFF May 3, 2025

9 6 minutes read

The U.S.’s taxing agency is in chaos. Changes at the top, DOGE layoffs and much more are creating havoc at the IRS.

Taxpayers haven’t yet felt the full effects from all the turmoil at the agency. The 2025 filing season has progressed smoothly, and tax refunds haven’t been delayed.

But just wait, experts tell us. It will take time for all the agency cuts to be felt by people outside the IRS, including taxpayers and the tax preparer community. Yes, more complex audits will decline. But that means the IRS will focus on the low-hanging fruit, exams that agents conduct solely through correspondence. But good luck in getting a reply to correspondence that you send to the IRS, even if your letter is in reply to an IRS notice. Taxpayer assistance will also suffer, including the phone lines.

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Let’s delve into some of the reasons for all the chaos.

1. Who’s in charge?

The IRS is on its fifth commissioner since January 1. Danny Werfel, the former official IRS commissioner, resigned soon after President Trump’s inauguration. Doug O’Donnell served as acting head for a month. Melanie Krause took over, but then opted to resign after the IRS entered into a controversial agreement with Immigration and Customs Enforcement (ICE) to purportedly share information on suspected illegals. Gary Shapley, a former IRS criminal investigator who alleged that the IRS wrongly handled its probe of Hunter Biden, was chosen by Elon Musk to lead the IRS. But Shapley was replaced after two days, when Treasury Secretary Scott Bessent complained to Trump that Musk installed Shapley as head of the agency without Bessent’s knowledge. The new acting head of the IRS is now Michael Faulkender, who will help lead the agency while also handling his principal job duties as deputy secretary of the Treasury.

In addition to the people serving as acting IRS commissioner, there have been other high-level IRS officials who have also left the agency or have announced their departures. They include the chief information officer, the chief taxpayer compliance officer, the chief privacy officer, the chief transformation and strategy officer, the chief implementation officer and many more.

Meanwhile, former Republican congressman Billy Long, Trump’s official pick for IRS commissioner, is on the sidelines. Long is now an advisor with the Office of Personnel Management while he awaits his Senate confirmation hearing.

Unlike previous commissioners, Long isn’t a lawyer or an experienced tax pro, nor has he run a large company or government agency. And he’s not a management and budget expert. Long was a congressman from Missouri. He was also an auctioneer, real estate agent and lobbyist. And he recently worked in the tax field promoting the employee retention credit (ERC), the COVID-19-related payroll tax break that the IRS claims is rife with fraud. Long could possibly face stiff opposition in his Senate confirmation hearing because of his ties to companies touting ERC refunds.

2. Staff layoffs and departures

The IRS is bleeding staff through deferred resignation programs and layoffs. On January 1, the IRS had about 100,000 employees. 11,000 people were either terminated or took the government’s first deferred resignation offer in February and March. Another 22,000 or so accepted the government’s second deferred resignation offer in April, and many of these workers have already left the agency or will be gone by May or June at the latest. And even more widespread layoffs or reductions in force are expected to take place.

All aspects of the IRS will be impacted, including enforcement, chief counsel, appeals, forms, taxpayer service, criminal investigation, and computer and database modernization. Many of the IRS workers who took the deferred resignation offers are near or at retirement age. The loss of experience and know-how will be hard to replenish with those who remain.

The IRS’s decision to share data with ICE doesn’t sit well with many people at the IRS. We said previously that this is what eventually led to acting commissioner Melanie Krause’s departure from the IRS. Under the pact, ICE would give the IRS the names and addresses of individuals suspected of being in the country illegally, and the IRS would use its locations database to confirm that information or provide updated addresses.

Critics say that this agreement violates the federal statute that generally prevents the IRS from disclosing taxpayer information. An IRS attorney, who was the agency’s subject matter expert on the federal statute banning disclosure of taxpayer data, left the IRS shortly after the ICE agreement was finalized. Tax experts also say that this agreement will lead to fewer tax return filings by immigrants, who are afraid that their identities will be disclosed to ICE. In the past, the IRS encouraged tax return filing by immigrants by promising not to share their information.

4. IRS modernization efforts halted

The 2022 Inflation Reduction Act gave the IRS a lot of money over a 10-year time span to be used for bolstering enforcement and taxpayer service and for modernizing the IRS’s antiquated databases and other IT systems. The IRS used a portion of that money to develop the Direct File program, create online taxpayer accounts, provide new computers to employees, and modernize its case management systems, among other things. Congress has clawed back much of the IRS’s Inflation Reduction Act money.

Since then, Congress has allocated zero dollars to the agency for modernization, and DOGE has come into the IRS and generally paused the agency’s modernization efforts. (We were told that DOGE did a one-week “hackathon” on the IRS’s databases.)

Some tax experts view DOGE as wanting to trade people for time- and cost-saving technology. But, with no money at the IRS to improve technology, and the IRS’s employees leaving in droves, how does this actually work in the short run and the long run?

5. A crackdown on regulations

President Trump’s regulatory crackdown is shaking up the IRS. One of Trump’s executive orders imposed a temporary halt on new regulations to give his administration time to vet them and decide which ones to keep or toss. Trump ordered that 10 existing regulations be wiped away for each one added. And he has reintroduced a rule from his first term that any proposed tax regulations undergo an extra layer of review by the Office of Information and Regulatory Affairs, a department that is within the White House Office of Management and Budget. Not all regulations will be affected. For example, routine IRS guidance should be protected. But many rules will be impacted.

The IRS is now reviewing old regulations to comply with Trump’s executive order to reduce the volume of agency guidance. And the agency is asking the tax community for suggestions on regulations that should be scaled back.

6. IRS’s Direct File program

The Trump administration is talking about ending the IRS’s Direct File program. This free, voluntary program, which the IRS first piloted last year and expanded this year, allows eligible individuals who live in one of 25 states to opt in and, with the IRS’s help, to prepare and electronically file their Form 1040s at no cost using a smartphone, laptop or other device.

Republican lawmakers and conservative-leaning organizations generally oppose Direct File, but the Trump administration chose to let it remain in place for the 2025 return filing season. Advocates for keeping Direct File say it’s a free, simple, time-saving tax preparation tool. Naysayers say it is a failed program that wastes resources, and that the IRS can use it to hound taxpayers.

One thing is for certain: Putting an end to Direct File would certainly benefit tax software companies, which see Direct File as competition and have lobbied hard to get rid of this free efiling program.

Is IRS playing politics?

Trump’s demand for the IRS to revoke Harvard’s tax exemption is causing angst among taxpayers, long-time IRS observers, and left-leaning exempt organizations that might also see their exemption under threat.

Similar to most private colleges and universities, Harvard has 501(c)(3) tax exemption, which means donors can get tax write-offs on their tax returns for donating to the school. There are also other tax advantages to having a 501(c)(3) exemption.

The Trump administration is singling out Harvard, alleging the university is not doing enough to combat anti-Semitism on its campus, among other things. After Harvard rejected a wide slate of White House demands, Trump apparently asked the IRS to look into terminating the university’s federal tax exemption. He also said on social media that “We are going to be taking away Harvard’s Tax Exempt Status. It’s what they deserve!” Revoking a university’s tax exemption is rare. It’s happened only once or twice before.

And it’s not just Harvard. Other groups could be on the hot seat. Princeton, Columbia, and Citizens for Responsibility and Ethics in Washington have been noted by Trump as groups that IRS exempt-organization lawyers should keep a close eye on.

Opponents argue that the IRS would be playing politics if it starts down this path of attempting to revoke tax exemption from organizations that Trump doesn’t like. They say that what Trump and other Republicans now want to do is not so different from, and may even be worse than, when the IRS last got caught playing politics. In 2013, the IRS got into trouble with Republican lawmakers for improperly targeting mainly conservative groups that were seeking 501(c)(4) tax-exempt status as social welfare organizations.

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