Why Trump and Musk's bid to 'save' money on the IRS could be very expensive

Americans really don’t like the IRS. It is literally their least favorite government agency, research shows.

The average member of the public may not be too upset, then, to hear that thousands of Internal Revenue Service workers are set to be fired as part of the Trump administration’s sweeping campaign to shrink the size of the federal workforce. But experts argue that, loathed as the IRS may be, slashing its staff in the name of saving money could prove to be very costly for the country.

Since President Trump returned to office, he has empowered Elon Musk’s Department of Government Efficiency to make widespread cuts across the federal government, firing workers by the thousands and even shutting down entire agencies altogether. One of the targets of those cuts has been the IRS.

According to the most recent reports, the IRS could see a dramatic downsizing that could lead to as many as 20% of its 100,000 employees being let go by the middle of May.

On the surface, that could be viewed as millions of dollars in savings on salary, but research suggests these cuts may ultimately hurt the country’s bottom line by making the IRS worse at its most important job.

“All these claims about the importance of dealing with waste, fraud and abuse across government. … Decimating the [IRS] has, literally, the exact opposite effect,” Natasha Sarin, a Yale University professor and former Treasury Department counselor, said at a tax conference earlier this month.

The IRS exists to collect tax revenue that is used to fund everything the government does. Every year, though, there’s a discrepancy between the amount of tax money the IRS is supposed to collect and the amount it actually brings in. Estimates put the “tax gap” as high as $700 billion per year, meaning Americans collectively owe an amount equivalent to 80% of the national defense budget that they are simply not paying.

If the IRS workforce shrinks, that means there are fewer people to chase down those unpaid taxes and close the gap. Studies have shown that investing in tax enforcement can result in returns that far outweigh the costs.

The Congressional Budget Office, a nonpartisan government agency, estimated in 2021 that every dollar spent on tax enforcement leads to between $5 and $9 in increased revenue. A more recent study found even larger gains by accounting for the fact that being audited tends to make people more likely to pay their full share of taxes in the future. According to this research, tax enforcement focused on the richest Americans can yield as much as $12 for every dollar spent.

Seven former IRS commissioners, who had served under Democrats and Republicans, wrote an op-ed in the New York Times last month denouncing the moves, arguing that cutting the agency’s enforcement capacity is “tantamount to a chief executive saying something like: ’We sold a lot of goods and services this year, but let’s limit our ability to collect what we’re owed.’”

The returns are biggest when audits are targeted towards the highest earners. Low- and middle-income people tend to make most or all of their income from wages that the government taxes automatically, so there’s not much room for them to underpay, and even when they do, it’s by a comparatively small amount. The richest Americans, on the other hand, are much more likely to have complex sources of income that are harder to track. Researchers at the Yale Budget Lab estimated that the top 1% of earners pay less than three-quarters of the tax they owe, depriving the government of more than $200 billion in revenue per year.

Even though auditing high earners yields a better bang for the government’s buck, it’s actually the poorest taxpayers who have historically faced the greatest chances of being audited. The IRS also began to dramatically cut back on the number of audits it conducted on the highest earners 10 years ago.

In 2022, under then-President Biden’s guidance, Congress approved $80 billion in additional funding for the IRS. That extra money allowed the agency to add 20,000 people to its workforce, many of them focused on ensuring that the rich pay their full share of taxes. The Biden administration estimated that the extra funding would provide an additional $850 billion in revenue for the government over the next decade.

Congress has already taken back $20 billion of that funding. DOGE’s cuts, depending on how deep they are and how many enforcement personnel are let go, could hamper the IRS’s tax enforcement efforts even further.

There are also signs that the president and his most famous adviser want to go further than simply reducing the IRS workforce. Musk celebrated a poll on X late last year that suggested the IRS budget should be “deleted.” Trump has also argued that the agency should be abolished entirely and replaced with an External Revenue Service focused on collecting income from tariffs.