Treasury Inspector General Warns IRS Struggles as White House Seeks Inflation Reduction Act Funding

(UNITED STATES) — Congressional Democrats and independent senators pressed Treasury Secretary Scott Bessent over cuts to IRS funding, saying the reductions will lower revenue collection by over $100 billion and increase the federal deficit by $60 billion or more.

Six senators — Sheldon Whitehouse of Rhode Island, Ron Wyden of Oregon, Angus King of Maine, Raphael Warnock of Georgia, Elizabeth Warren of Massachusetts and Peter Welch of Vermont — sent Bessent a letter questioning the effects of slashing up to 40% of the IRS workforce. They asked how the cuts would affect revenue, customer service, modernization and audits of corporations and high earners versus those making under $400,000.

The lawmakers tied their criticism to money Congress provided in the 2022 Inflation Reduction Act and to additional reductions backed by President Trump’s administration. They argued the cuts would weaken enforcement and allow wealthy tax evaders to avoid audits.

Their letter also cited a Treasury Inspector General report showing IRS enforcement staff already shrank by 31% because of probationary terminations and a deferred resignation program. The senators said the report added to concerns that the agency was losing the staff needed to pursue unpaid taxes at the top end of the income scale.

That debate has centered on the scale and purpose of the Inflation Reduction Act funding. The law originally provided nearly $80 billion in mandatory funding through 2031, including $45.6 billion for tax enforcement.

Lawmakers who oppose the cuts say that money was meant to narrow the $700 billion tax gap. They pointed to figures showing the top 1% accounts for 30% of unpaid taxes, while the bottom 50% accounts for 5.5%.

Those numbers have become a central argument for Democrats and independents who say IRS funding has less to do with broad-based enforcement than with collecting taxes already owed by the highest earners. In their view, reducing the agency’s reach will cost the government more than it saves.

Congress has already clawed back most of the enforcement money. In three years, lawmakers eliminated nearly all of the $45.6 billion through deals including the Fiscal Responsibility Act.

That left the account at $300 million as of June 30. $3.5 billion had been spent as intended before the rescissions reduced the balance.

Another reduction is pending in the Senate’s fiscal 2026 spending process. S.258 would rescind another $11.7 billion from operations, further cutting into resources the IRS had expected to use over several years.

The administration has also proposed another round of cuts outside the rescissions. The President’s budget calls for an additional $2.5 billion reduction to discretionary funding.

Together, the rollbacks have turned what was once a long-term expansion plan into a shrinking budget picture. That is the backdrop for the latest complaints from Whitehouse and the other senators, who said the effects now reach beyond enforcement into daily agency operations.

Workforce losses sit at the center of those concerns. The senators said the administration could cut up to 40% of the IRS workforce, a level they said would affect audits, customer service and modernization efforts at the same time.

The Treasury Inspector General figures already point to a steep decline in one part of the agency. Enforcement staffing fell by 31% because of probationary terminations and the deferred resignation program, the senators wrote.

Another data point shows how sharply the losses have hit the highest-end audit work. The IRS division auditing billionaires lost 38% of staff, while tens of thousands of total workers departed since inauguration.

That mix of broad departures and targeted losses has sharpened the fight over whether staffing cuts save money or forfeit future collections. Bessent has claimed fewer auditors will not reduce revenue.

Democrats and independents disputed that argument by pointing to Congressional Budget Office analysis linking the number of revenue agents to enforcement yields. That analysis estimated $200 billion in added revenues from the full $80 billion Inflation Reduction Act boost.

King put the longer-term cost even higher. He cited $2.4 trillion in lost revenue over a decade.

Another estimate addressed the effect of recent firings. Budget Lab estimated that firing over 7,000 probationary employees would add $100 billion to the deficit.

Those competing numbers have widened the dispute over IRS funding from a budget line item into a larger fight over deficit policy. Critics of the cuts argue that reducing tax enforcement can worsen deficits even when spending falls on paper.

They also argue that audit patterns matter. Whitehouse and the other senators wrote that by the end of Trump’s first term, low-income Earned Income Tax Credit recipients were audited at higher rates than millionaires.

That point has helped shape their broader criticism of the administration’s approach. In their letter, they asked whether the shrinking workforce would further tilt enforcement away from corporations and wealthy taxpayers and toward people with lower incomes.

Republicans have framed the issue differently. House Ways and Means Chairman Jason Smith supported President Trump’s executive order freezing federal hiring, including IRS agents.

Smith said the freeze protected middle-class families and small businesses from “weaponization.” He also pointed to the 2023 Fiscal Responsibility Act, which rescinded new auditor funding.

Republicans have argued that the original law put too much weight on enforcement compared with basic taxpayer help. They noted that Inflation Reduction Act enforcement funding was 14 times more than customer service funding.

That ratio has remained a talking point as both parties try to define what the agency should prioritize. Supporters of the cuts say it shows Congress tilted too far toward hiring auditors rather than helping people comply with tax rules.

Republicans have also cited delays in 1099-K reporting rules for gig workers. Those rules are being phased in with a $5,000 threshold.

For critics of the original funding plan, that phase-in helps show why a larger enforcement apparatus could sweep in taxpayers far beyond the wealthiest households. For Democrats, the bigger issue remains the tax gap and who leaves taxes unpaid.

The administration’s latest budget push has added pressure to an already diminished IRS. A bipartisan budget deal had already cut discretionary base funding by over $1 billion (9%).

That means the IRS has faced a layered reduction: rescissions of mandatory Inflation Reduction Act money, a discretionary base cut and the proposed $2.5 billion additional reduction in the President’s budget. The result, critics say, is a smaller agency with fewer people to pursue complex tax cases.

Supporters of the funding cuts reject the argument that lower staffing must mean weaker collections. Bessent’s position that fewer auditors will not reduce revenue captures that view, even as opponents cite the CBO estimates and the Treasury Inspector General findings.

The clash also reflects a broader split over what IRS funding is supposed to accomplish. One side sees enforcement dollars as a way to close a $700 billion tax gap concentrated among top earners. The other sees the same funding as an expansion that risks hitting middle-class families and small businesses.

Numbers from the Inflation Reduction Act have become shorthand for that dispute. The law’s nearly $80 billion total, the $45.6 billion set aside for enforcement and the 2031 timeline all now serve as markers of how much of the original plan still survives.

Very little remains in the enforcement account after three years of rescissions. With the balance down to $300 million as of June 30, the Senate seeking another $11.7 billion in cuts from operations and the White House backing another $2.5 billion reduction, the battle has shifted from expansion to retrenchment.

Democrats and independents say that retreat carries a measurable cost. They point to over $100 billion in reduced revenue collection, at least $60 billion in added federal deficits, a $100 billion deficit impact from firing over 7,000 probationary employees and King’s estimate of $2.4 trillion in lost revenue over a decade.

Republicans answer that the cuts protect taxpayers from an agency they say had received too much enforcement money. They continue to frame the reductions as a guardrail against “weaponization” and as a correction to a funding mix they considered too heavily tilted toward audits.

For now, the Treasury Inspector General report and the senators’ letter have put staffing losses at the center of the debate. With enforcement staff already down 31% and the billionaire audit division down 38%, the argument over IRS funding has become a test of whether the government collects more by investing in auditors or by cutting them.