On Tax Day, TPC hosted a two-panel, two-hour discussion on the state of the Internal Revenue Service. The conversation, featuring former agency officials, technology and legal experts, economists, and policy analysts, painted a complicated picture of an agency facing deep budget and staffing cuts, risks to public trust, and big questions about the future of tax administration. You can watch this recording of the event, but here's a breakdown of some of the most pressing issues the panelists raised.
How did the IRS end up in this much trouble?
Panel moderator and TPC Senior Fellow Janet Holtzblatt opened the discussion by laying out the numbers. Since February, the IRS has lost more than 10 percent of its workforce, including key leaders, through layoffs and buyouts. And as of Tax Day, another 20,000 employees are reportedly accepting buyouts. Add to that Congress’s decision to roll back over $40 billion in Inflation Reduction Act enforcement funding, and the result is a severe pressure on an already strained agency with dwindling resources and deepening uncertainty.
What was the vision for modernization before the “strategic pause” at the IRS?
Before the Department of Government Efficiency (DOGE) halted them, IRS staff were working on ambitious initiatives aimed at updating its IT systems. Barry Johnson, former IRS Chief Data and Analytics Officer and TPC nonresident fellow, described systems designed to improve the taxpayer experience: expanded online accounts, AI (artificial intelligence)-assisted notices, and real-time fraud detection. But now, many of those projects are frozen, and confusion reigns.
Can AI really replace taxpayer services?
Not without risks, according to the speakers. Pete Sepp of the National Taxpayers Union noted his long-time support for modernization, but questioned the transparency of AI systems under current discussion. Daniel Ho of Stanford warned of “model collapse,” where flawed inputs degrade AI output. For example, poor audit decisions and outcomes can teach AI the wrong lessons, which can become embedded in AI recommendations. He urged a product-model approach focused on continuity and support, instead of short-term tech surges that might leave broken systems and untrained staff in their wake. Johnson concurred, noting the value of human experts to train and check the work of AI.
Is the planned IRS hackathon a hopeful sign, or a red flag?
The panelists said it’s both. The IRS hosted a hackathon to develop a new application programming interface (API) that allows different software applications to work with each other. Sepp noted this could streamline data integration across over 60 legacy systems. But panelists were generally wary. Nina Olson raised questions about who will be brought in and whether proper oversight will be in place, noting recent website errors that misinformed taxpayers about filing deadlines. “If you're just going in and messing with stuff,” she said, “you don't understand the interconnectivity.”
What are the risks of IRS sharing data with ICE?
Olson expressed alarm over a memorandum of understanding that could allow the IRS to supply ICE with massive amounts of taxpayer data given the potential violation of Section 6103. Johnson noted past data-matching problems, especially with names of Hispanic origin, raising civil liberties concerns.
Are budget cuts just an internal challenge, or a policy problem?
They’re both, according to the panelists. With annual appropriations frozen and modernization defunded, the IRS has been tapping IRA funds to cover basic costs like salaries. Phil West, former Treasury official, said this short-term patchwork hides long-term damage: a demoralized staff, lost institutional knowledge, and a crippled enforcement function.
Are tax morale and the tax base in jeopardy?
TPC’s Vanessa Williamson thinks so. Americans have unusually high tax morale, but when enforcement is visibly weakened and fairness seems optional, that morale may collapse. Kim Clausing of UCLA pointed to the $700 billion annual tax gap as a symptom of rising tax evasion among the wealthy. And West noted that the tax gap is largely comprised of small businesses and individuals. That means enforcement gaps and eroding IRS capacity are especially consequential in the small business sector, where income is often self-reported and harder to verify. Alex Brill of the American Enterprise Institute and Clausing both highlighted the growing gap between W-2 earners and high-income filers with opaque income streams. Without better data and consistent enforcement, trust and compliance could both unravel.
Are we watching the income tax system being dismantled in real time?
TPC’s Howard Gleckman wondered, and some think it may be at risk. Panelists cited rhetoric favoring tariffs over income taxes, budget gimmicks, and enforcement retreat as warning signs. West called some recent fiscal maneuvers “fraudulent” budgeting.
Is there any good news?
Yes, assured the speakers: It’s the people. Despite everything, IRS employees remain committed to public service. Johnson praised their resilience and capacity, saying they are “a great resource for whoever comes next to build on and try to put things back together again.” That, said Holtzblatt, is something even technology can’t replace.
