It looks like the anti-weaponization fund may be dead (or it might just be temporarily comatose), confirming that my political predictions are usually wrong. Some combination of the courts and a handful of congressional Republicans growing a bit of a spine may have done the trick. Or maybe not.
Here are some excerpts from the June 2nd NY Times story reporting that Blanche was abandoning the fund:
Todd Blanche, the acting attorney general, said on Tuesday he was withdrawing a proposal to create a $1.8 billion fund to compensate people claiming to be victims of unfair prosecution, amid a revolt among Republicans who saw it as an ethical and political disaster.
“We’re not moving forward with the fund, period,” Mr. Blanche told members of a House Appropriations subcommittee. He repeated himself to make clear that he meant the fund proposal would be permanently withdrawn.
…
But Mr. Blanche said he would leave in place an order he signed last month that would, in effect, block the I.R.S. from investigating Mr. Trump, his family and his businesses for existing tax violations.
But the president continued to defend the fund. Not long after the Senate began debating the bill, Mr. Trump himself cast doubt on whether he had truly abandoned the fund, telling reporters at the White House that “I love it” and that “it’s so important.” He said he was unsure of its fate.
Similarly, from CNBC interview with Trump (posted 6/7/2026) when he was in western Wisconsin recently:
Trump sat with NBC’s Kristen Welker for a taped interview on a Wisconsin farm that touched on the Iran war, potential interest rate hikes, and the $1.776 billion “weaponization” fund that could financially compensate convicted violent rioters who attacked police officers on Jan. 6, 2021. Thousands of people stormed the Capitol that day, attempting to disrupt the certification of former President Joe Biden’s 2020 election victory.
The president said he would like to see the weaponization fund proceed despite setbacks that prompted acting Attorney General Todd Blanche to say it was permanently halted.
“If it was up to me, I’d pay them the kind of money that they deserve,” Trump said of the fund. “People have been destroyed. Lives have been destroyed. Many suicides, think of it.” The president has repeatedly made such claims without providing evidence.
…
Welker attempted to press Trump for evidence [of election fraud] to back up his claims, which he did not provide, and redirect Trump to a question about acting AG Blanche several times before the president pulled the plug on the interview and stormed off the set.
“Let’s call it quits because I’ve had enough, thank you, darling, have a good time,” the president said as he crushed his lapel mic underfoot on his way out.1
So, unless Congress can get an ironclad prohibition into legislation that Trump signs into law, it may rise again like a Phoenix. Here’s one effort to do that (by imposing a 100% federal tax on distributions).2 That may explain Blanche’s refusal to put his commitment into writing, per the Times reporting:
Democrats repeatedly requested that Mr. Blanche commit to rescind, in writing, his order creating the payout fund.
“You started it, you established it in writing, so it just makes sense to rescind it in writing,” said Representative Grace Meng, Democrat of New York.
“I’m not committing to put anything in writing,” he said, adding that he would abide by his word and would take the request under advisement.
Trump’s opposition to the prohibition almost surely explains why Republican senators beat back efforts by the Dems to eliminate or restrict the fund in the ICE funding reconciliation bill. NY Times story. That despite the fact that, according to the WSJ, more than a dozen Republican senators privately urged Trump to drop the fund. Privately urging and publicly doing your job and voting are, of course, two entirely different things.
What’s clear is that the IRS is going to give the Trumps and their businesses a pass on their filed tax returns. That’s a huge win for them and will likely let them skate on millions in potential tax liability. It could extend to future years, if they falsely claimed NOLs for any of the back years that carryforward. NY Times story excerpts:
Senate Republican anger about President Trump’s $1.8 billion fund for people who claim to be victims of federal overreach was loud and apparent.
It held up the Republican agenda in Congress for weeks, and during a marathon voting session on Thursday and early Friday, several Republicans voted to end the fund, though those efforts failed. Still, the furor forced the acting attorney general, Todd Blanche, to announce this week that he was abandoning it entirely.
Not so for the sweeping protections from I.R.S. audits that Mr. Blanche also ordered up for Mr. Trump and his family. On that front, Republican reaction has been much more muted, and Mr. Blanche said the audit shield would stay in place. A Democratic effort to cancel the audit protection failed on a voice vote.
The result is that an apparently unprecedented and enormously valuable public benefit for the president has, so far, flown under the radar in Congress and passed into Mr. Trump’s hands without much protest from members of his own party.
…
“He’s been audited many, many times, and many of those audits have continued for years and years and years,” said Joseph J. Thorndike, a tax historian. “I have no reason to believe that any other president has had anything like this kind of relationship with the I.R.S., as a private citizen or president.”
In 2022, the House Ways and Means Committee, then led by Democrats, released several years of Mr. Trump’s tax returns, an effort that had to overcome a legal challenge by Mr. Trump that ultimately went to the Supreme Court. The committee also published information about how the I.R.S. had audited him.
The I.R.S. opened 10 audits of Mr. Trump and his holding company between 2019 and 2022, questioning a variety of his tax positions, according to the investigation. Among the major issues were the legitimacy of enormous business losses he routinely recorded on his tax returns, as well as whether a tax break claimed on his Seven Springs estate in New York was valid. I.R.S. officials visited the Seven Springs property in January 2022, after Mr. Trump had left office.
There are serious (ahem, academic) questions about the legality of the agreement. See this Tax Notes story (no paywall). Excerpts:
The May 19 order, signed by acting U.S. Attorney General Todd Blanche following the dismissal of Trump v. IRS, No. 1:26-cv-20609 (S.D. Fla. 2026), also likely exceeds the scope of what the Justice Department may do, legal and policy professionals told Tax Notes.
“There is no historical precedent for this kind of presidential immunity from the IRS,” Ajay K. Mehrotra of Northwestern University Pritzker School of Law said. “This is truly unheard of.”
…
Negotiations involving Trump to end tax audits of himself, his family, and his businesses could violate section 7217, which prohibits the president from directly or indirectly requesting the termination of a tax audit, Brandon DeBot of the Tax Law Center at New York University wrote in a blog post.
“Trump’s dirty deal has crossed the line into illegality,” Robert Weissman and Lisa Gilbert of Public Citizen said in a statement, adding that the agreement may put IRS officers at risk of breaking the law.
However, a potential violation under section 7217 would likely hinge on Trump’s involvement because that section doesn’t apply to the U.S. attorney general.
Abigail Bellows of Common Cause said the agreement could also violate the emoluments clause of the Constitution because Trump could benefit financially if there is a discharge of an outstanding large tax audit.
A later administration, I presume, could reverse that administrative decision, making it a matter of whether the SOLs have run on the respective issues. I assume for many of the most important ones (e.g., the issue about NOLs generated by Chicago building) they will have. But for newer returns (e.g., relating to the crypto income and so forth from this administration), it likely will not have.
The speculation proved correct. A one-page addendum to the “settlement agreement”1 of Trump v. IRS, washed away the ongoing tax audits of Trump, the family businesses, and Eric and Don Jr., as well as any potential audits for tax returns filed before May 19, 2026 (gee, I wonder if they filed for extensions for tax year 2025?).
The NYU Tax Law Center has an explanator on the lawsuit and settlement agreement, including why it likely violates various provisions of federal law. Of course, because of standing rules, enforcing the law via court action is another matter.
The tax audit protection appears as a minor after-thought or concluding feature (a la Steve Jobs’ “one more thing”) of a broad attempt to provide sweeping immunity for a broad, but ill-defined set of criminal and civil actions – past and apparently future.2 The language (for a legal document) is convoluted and odd (e.g., “matters that * * * could have been raised * * * could be pending” incorporates what can only be characterized as speculation or conjecture).
Here’s the language:
FWIW, Lawfare and Weaponization as defined in the settlement agreement, which the addendum means:
the sustained use of the levers of government power by Democrat elected officials, political and career federal employees, contractors, and agents in order to target individuals, groups, and entities for improper and unlawful political, personal, and/or ideological reasons (“Lawfare” and “Weaponization”). Other well-known examples of Lawfare and Weaponization include the Biden Administration’s abuse of the FACE Act, the Biden Administration’s wrongful labeling of certain parents as domestic terrorists, and the IRS’s targeting of groups based on improper ideological criteria.
Note that only “Democrat elected officials” can conduct defined lawfare, along with federal employees, contractors, and agents. The last clause regarding IRS targeting for “improper ideological criteria” appears to be an invitation to the Tea Party groups whose tax-exempt determination letters were delayed during the Obama administration to apply for compensation.
The creativity of this administration in finding new ways to line the pockets of Trump family, friends, and supporters knows no limit.
The IRS is part of the executive branch, but the agency has historically tried to keep its enforcement operations free from political interference, and even the appearance or prospect of blurred lines caused controversies during the Nixon and Obama administrations. The agreement between Trump as a taxpayer and the Trump administration is an unprecedented blending of personal and governmental interests, with a Trump-appointed official agreeing to remove the president, his family and his businesses from tax enforcement.
…
Tuesday’s addendum includes broad language in which the U.S. pledges to cease pursuing any matters that are or could be pending with the IRS and with other agencies or departments. The statement includes family members and “related or affiliated individuals,” although it doesn’t clearly define those terms.
“I am unaware of a single precedent where the IRS has agreed in advance to permanently forgo examination of previously filed tax returns for a specific person or business,” said Danny Werfel, who was IRS commissioner under former President Joe Biden. “People expect the same tax rules and enforcement framework to apply to everybody.”
…
The tax code prohibits the president and the heads of executive agencies—except the attorney general—from directing audits or the termination of audits. Violating the law is a crime punishable with prison time. It isn’t clear whether and how that prohibition would apply to the settlement addendum released Tuesday.
Also uncertain is whether anyone would have standing to challenge the agreement in court. Congress could step in, but such a move likely would require Republican votes over Trump’s objections.
The NY Times story (written by the Adam Liptak, the SCOTUS reporter for the Times) on the overall issue covers more sweeping ground, touching on the constitutional issues raised, the source of funds (the judgment fund), and historical precedent. Excerpts from the story:
The whole enterprise was a jarring shock to the conventional understanding of the constitutional system, raising what legal experts said were profound questions about presidential power. If the arrangement is allowed to stand, they said, Mr. Trump will have managed simultaneously to thwart Congress’s power of the purse and the ability of the courts to police the separation of powers.
Indeed, Tuesday’s addendum [Trump’s tax forgiveness/immunity] flirted with a grave question with no settled answer: Can the president pardon himself?
…
“It is really difficult to think about how to frame a judicial challenge to what the president has done here,” said Samuel R. Bagenstos, a law professor at the University of Michigan. “That doesn’t mean people aren’t trying, and that doesn’t mean something might not succeed.”
Legal challenges are indeed starting to roll in. Two police officers who defended the Capitol on Jan. 6, 2021, sued the Trump administration on Wednesday in an attempt to block the new fund, though it is not clear that they have standing to challenge it.
…
Professor Bagenstos, who served as the general counsel of the Office of Management and Budget and of the Department of Health and Human Services in the Biden administration, wrote in January about the danger posed by the Judgment Fund.
“An administration that wished to spend money on projects or beneficiaries not authorized by Congress,” he wrote, “could simply encourage its desired recipient to bring a lawsuit against the United States and then settle that lawsuit (no matter how frivolous) by making a payment from the Judgment Fund.”
…
And the suit was palpably collusive, ordinarily a reason for a judge to toss a case.
Tuesday’s addendum to the settlement, the codicil purporting to immunize Mr. Trump and his family, raised its own legal questions.
“It’s a really extreme and shocking kind of document,” Professor Bagenstos said.
Even under the Supreme Court’s 2024 decision conferring broad immunity on Mr. Trump for his official acts, purely private conduct, as the filing of a tax return would seem to be, is fair game for prosecution after a president becomes a private citizen. It is not clear whether the addendum could block a future administration from pursuing such a claim.
A series of settlements by the Obama administration that involved dipping into the same fund Mr. Trump now wishes to use illustrate the dynamics of Congress’s open-ended delegation.
Take a lawsuit brought by Native American farmers in 1999 over what they said was discrimination by the Agriculture Department. A judge denied class certification for monetary claims, meaning the government probably did not face a risk of a large court judgment. Still, after more than a decade of litigation, the government in 2011 agreed to settle the suit.
When not enough Native Americans submitted claims, the government paid out only $300 million of $680 million it had agreed to set aside. It redirected the balance to nonprofit groups serving Native Americans.
An appeals court allowed the payment to be made. In a dissent, Judge Janice Rogers Brown of the U.S. Court of Appeals for the District of Columbia Circuit said the majority had taken perverse pleasure in letting the administration do as it wished.
“Perhaps one day, I will possess my colleagues’ schadenfreude toward the executive branch raiding hundreds of millions of taxpayer dollars out of the Treasury, putting them into a slush fund disguised as a settlement, and then doling the money out to whatever constituency the executive wants bankrolled,” she wrote. “But, that day is not today.”
That settlement, though, bore only a superficial resemblance to the deal announced this week. It arose from actual litigation. And Mr. Obama did not stand to directly gain from it.
My catty comments
This whole episode – in particular the use of the judgment fund – illustrates how laws are typically written that presume basic good faith and norm following practices by government officials, but that can be exploited by unscrupulous executive branch officials. Trump and his people are unusually creative in finding those gaps and using them for their personal and political benefits.
We’ll see if Senate Republicans actually have a red line. Majority Leader Thun was quoted as saying he wasn’t “a big fan” of slush fund/settlement agreement. I guess that’s a condemnation in a world in which upsetting the dear leader risks being treated like Cassidy or Massie. As tiny evidence of a backbone, the Senate appears to be showing some resistance. How? By leaving town, of course. We’ll see if they follow form and knuckle under when they return or if they’re actually willing to put limits on the slush fund. I wouldn’t be surprised if they abandon the reconciliation bill (making ICE and CBP rely on the OBBBA’s money) rather than taking a series of tough votes on Democrats’ amendments during the vote-a-rama.
We didn’t need any more evidence of the administration’s or the GOP’s utter lack of concern about out-of-control government spending (as they typically put it) or the growing federal debt, but this provides it. That was the asserted reason for DOGE cuts (taking medicine and vaccines away from poor individuals in third world countries, cutting medical and scientific research midstream, laying off civil servants, etc.). Now, if the widespread assumption is true that pardoned J6ers are a prime beneficiary of this largesse,3 we’re handing out government to people convicted of beating police officers and sacking the US capitol.
Payments from the settlement fund likely are taxable to the recipients under general tax law rules in most cases. Good luck with DOJ issuing 1099s. The Tax Law Center makes the plausible argument that the entire fund allocation is taxable to the plaintiffs (i.e., Trump et al).
Given the likely insider trading in oil futures that appears to be based on information derived from the administration sources as well as Trump’s prescient stock trades, I wonder if hyper aggressive tax returns were filed last month in anticipation of the audit immunity by Trump, Don Jr., Eric, and/or the businesses. It would be consistent with appears to be the practice.
Gift tax returns may have been filed and the ability to challenge the reported valuations, which may also govern subsequent estate tax returns, will have evaporated if this is legal.
Similarly, the various enterprises they have been engaged in (consider the funding of their crypto operations as one example), there are sure to be a host of opportunities to under report income and so on. No worries, you have an Audit Immunity card.
Continuing to think about the implications of all this makes my mind melt down.
Notes
It’s hard for me to characterize something as a settlement when the same person is ultimately calling the shots on the putative dispute that is being settled – hence, my scare quotes. ↩︎
If this were legal, it’s better than a pardon. I assume that the Trump (following and likely going Biden one better) will issue blanket, sweeping pardons to a host of family, friends, and supporters just before the end of his term. But pardons (I presume without doing the legal research) can only be issued for past actions. The addendum appears to apply to future actions, including stuff happening after Trump leaves office. Moreover, what happens if Trump drops dead before he can issue pardons? One wouldn’t want to count on Vance to do so, I suppose. My natural assumption is that this cannot be legal, at least with regard to actions happening after the effective date. ↩︎
For comic relief, read this Bulwark piece on the fight among the lawyers who have been representing J6ers in their efforts to get reparations that the settlement agreement has touched off. The media and Democrats in congress have assumed that the capitol rioters are intended to be principal beneficiaries of the fund. That is why current and former capitol police officers have quixotically sued to invalidate the fund. Act AG Todd Blanche, in his congressional testimony, refused to say who specifically will qualify to be compensated by the fund, of course. ↩︎
Plaintiffs have dismissed the case, which they have the right to do since defendants have not made a filing in the case, per this notice. So much for getting a judicial patina for their slush fund. They could read the judicial tea leaves as clearly as any of us.
The district judge’s likely plan to dismiss the case (probably done with a stinging memorandum that unmasks the corrupt enterprise) must have convinced them that cutting and running was the best course of action. Unfortunately, that may not mean that we won’t still see the fund appear. Here’s an excerpt from the NYTimes story on the dismissal (my emphasis added):
President Trump withdrew his lawsuit demanding at least $10 billion against the Internal Revenue Service in an effort to skirt oversight by the judge in the case as he moves toward arranging a fund to funnel taxpayer money to his allies and supporters.
The dismissal is the latest legal turn in an extraordinary attempt by Mr. Trump to win billions of dollars in damages from a government agency he controls.
Administration officials have in recent days considered creating a roughly $1.7 billion fund to compensate political allies, but not Mr. Trump directly, who say they were wronged by the Biden administration. That fund appears to be part of private deal, reached outside the purview of the court, to resolve both Mr. Trump’s I.R.S. lawsuit and his separate administrative claims against the Justice Department, according to people familiar with it who described it to The New York Times last week.
The move by Mr. Trump was a remarkable end-run around the legal system, effectively stripping Judge Kathleen M. Williams, who has been overseeing the case in the Southern District of Florida, of her normal role in approving a formal settlement agreement. By dismissing the case in its entirety, Mr. Trump essentially freed his hand to reach a deal with administration officials without any judicial oversight.
I assume that must mean they have a theory that an implied or otherwise preexisting authorization and appropriation permit them to spend the money. IMO this is the converse of DOGE reneging on spending money under specific authorizations and appropriations (e.g., for USAID operations). So much for Congress’s once vaunted power of the purse. It appears POTUS can spend or refuse to spend pretty much without much limit.
A few minutes after I wrote the above, DOJ announced the creation of the fund with the catchy $1776 million amount. It cited the precedent of Obama’s compensation for victims of racial discrimination by USDA, SBA, and other agencies. Here’s the quote from the DOJ press release:
There is legal precedent for such a Fund, most notably the “Keepseagle” case where the Obama Administration created a $760 million fund to redress various claims alleging racism against the federal government over a period of decades.
In Keepseagle, hundreds of millions of dollars remaining in the fund were distributed to non-profits and NGOs that never made claims, whereas any money remaining in The Anti-Weaponization Fund will revert to the federal government. The Obama DOJ settled by putting $680 million from the judgment fund into a bank account for a single claims administrator to dole out. In Keepseagle the remaining money—which ended up being over $300 million—was distributed to the entities that had not even submitted claims.
In addition, establishing the settlement fund appears to have caused the Treasury Department’s general counsel to resign. Per the NYTimes:
The top lawyer at the Treasury Department stepped down on Monday in the wake of the creation of a $1.8 billion “anti-weaponization fund” that could soon make payments to President Trump’s political allies, according to three people familiar with the move.
Brian Morrissey, the Treasury’s general counsel, resigned from the position seven months after he was confirmed to it by the Senate and just hours after the Trump administration announced the fund on Monday.
That seems like an appropriate response to legal looting of the treasury like this.
Original Post
Media coverage (e.g., NYTimes, ABC, Bulwark) speculates that the court’s order directing the parties to file memoranda addressing whether the court has jurisdiction will stimulate a settlement of the case. The court issued its order, I think it is fair to say, because that is what it was concerned would happen: the defendant (IRS/DOJ/US government) had not filed an appearance, while the plaintiffs (Trump, his businesses, and two elder sons) had requested a global extension to facilitate settlement discussions. The court explicitly mentions that motion in its order.
As noted in my April IRS update, another factor was likely the court’s sua sponte motion to appoint amici to weigh in the jurisdictional issue (i.e., given Trump’s potential control of both sides of the lawsuit, is there an article III case and controversy?). That memorandum has been filed. Some excerpts from it (citations and footnotes omitted):
This case is unprecedented: A sitting president seeks monetary damages for alleged harm to his personal interests from an executive agency that he controls. That presents significant Article III subject matter jurisdiction concerns.
While this scenario is novel, the governing legal principles are not. The question at hand is whether the circumstances of this litigation present the kind of real and genuine dispute that is suitable for judicial resolution in an Article III court. And the Constitution and the applicable case law indicate that the Court should answer that question by conducting a fact-specific inquiry focused on (1) the relationship between the parties, and in particular whether they are sufficiently independent of one another, and (2) whether the Court could enter a judgment in this case that would have any concrete effect.
…
The Supreme Court has looked to principles of control in the context of a suit between a sitting President and a component of the Executive Branch. In United States v. Nixon, the Court held that a dispute between two executive-branch actors—the President and the Special Prosecutor appointed to investigate Watergate matters—could be heard by a federal court. The Court found adequate adversity because the Special Prosecutor was sufficiently independent.
…
With respect to these Defendants specifically, the President’s capacity for control is extraordinary. As a member of the President’s cabinet, the Secretary of the Treasury “is and must be the President’s alter ego in the matters of that department where the President is required by law to exercise authority.” Likewise, the IRS Commissioner is appointed by the President to a five-year term, and “[t]he Commissioner may be removed at the will of the President.” And President Trump has shown he is willing to exercise that authority. In August 2025, two months after IRS Commissioner Billy Long’s confirmation, President Trump removed him without providing a reason.
…
There is also reason to believe that the President is, in fact, exercising his control over the Defendants in this litigation. President Trump’s own statements suggest that he believes he has control over the Defendants and the DOJ lawyers charged with defending this case. On January 31, 2026, two days after President Trump filed the Complaint, a reporter asked him, “what it’s like to be on both sides of a lawsuit.”8 He responded, “It’s very interesting. I have another one where, you know, I virtually won the Mar-a-Lago break-in suit, and, you know, I have to work out some kind of a settlement. I’m supposed to work out a settlement with myself.” When asked on February 4, 2026 whether he could direct the Attorney General and the Treasury Secretary to pay him, President Trump responded: “[W]hat I would do, tell ‘em to pay me, but I’ll give 100% of the money to charity. I don’t want any of that money.”
The contrast between Defendants’ conduct here and the government’s conduct in related litigation also suggests that the President may have control over DOJ’s litigation conduct. The parties are engaged in settlement negotiations in this case, even though DOJ has asserted substantial defenses in other cases stemming from Mr. Littlejohn’s disclosures of tax information—including cases litigated during President Trump’s current term. For example, DOJ has argued that, because Mr. Littlejohn was a government contractor rather than an officer or employee of the United States, sovereign immunity was not waived.
…
Although President Trump sues here in his individual rather than official capacity, that does not affect the control analysis. The personal nature of the lawsuit is a notable point of distinction from United States v. Nixon, where the Supreme Court treated the dispute as one between the Special Counsel and the President in his official capacity. * * * [T]he fact that President Trump is a Plaintiff in his personal capacity does not diminish his ability to control the Defendants here in his official capacity as President; rather, President Trump enjoys ample actual and practical authority to control the Defendants. These indications of control are in stark contrast with Nixon, where the legal and practical independence of the Special Prosecutor, enshrined in regulation and evidenced by the litigation conduct of the parties, was central to the Supreme Court’s decision that the dispute before it was justiciable.
…
Because the relationship between the parties is essential to the adversity inquiry, it could be useful for the Court to obtain additional information about the degree to which Defendants and their lawyers are insulated from the President. The Court might request information from the parties about what measures, if any, they have taken to ensure that Defendants and the DOJ lawyers assigned to this case are free to exercise independent litigation judgment and act solely in the best interests of Defendants. It is particularly important to evaluate whether they have any protection if they take steps that could result in the defeat of the President’s claims. Any such measures must be considered against the backdrop of the President’s public assertions of direct control over the government defendants and their attorneys, as well as his previous public statements regarding his control over this particular matter.
I can see why Trump’s lawyers (and the political appointees at Treasury, IRS, and DOJ) would want to expedite a resolution. I doubt that they want a pesky federal district court judge asking questions about the relationships between the WH, DOJ, and IRS and whether defendants’ lawyers, assuming they present a vigorous defense (as FWIW, they are ethically obligated to do) which would likely defeat the claims,1 will be protected from retaliation.
I suspect there is also a high probably that the judge would dismiss the case because she does not have jurisdiction. That would eliminate the option (a main purpose, I assume, of the litigation) of putting a judicial patina on the misappropriation of the government funds to benefit the family and MAGA supporters.2
Based on the Times and ABC news articles, the speculation about a settlement appears to be twofold:
Creation of a $1.7 billion fund to compensate victims of the Biden Administration’s weaponization of the US legal system, such as the prosecution of January 6th defendants. The sky’s the limit here in defining who victims are – at least, if Trump’s doling out pardons is any guide of what is likely to be considered meritorious (such as corruption convictions or financial crimes) and victims of the Biden administration.
Resolution of the IRS audits of Trump and his business entities. That is something that has been off the radar for a while. This Tax Law Center blog post points out that DOJ does not have technical legal authority to do that. If that is what the WH wants, IRS leadership likely will make it happen – whether as part of a settlement or otherwise. I also suspect if it happens, it will be leaked to the media.
While the exact terms of the settlement are still being finalized, sources have described the proposed compensation fund as a hybrid between a victim compensation fund — similar to the civil claims process that followed the 2010 Deepwater Horizon oil spill — and a truth-and-reconciliation-style commission. Examples of truth and reconciliation commissions in other countries include governmental acknowledgment of wrongdoing related to apartheid in South Africa and Canada’s Indian residential school system.
Over the last year, the Justice Department has utilized a so-called “Weaponization Working Group” to examine what it has described as abuses of power by the Biden administration, identifying cases of alleged anti-conservative and anti-Christian bias — claims that are disputed by former officials.
Trump’s proposed commission is expected to be composed of five members who would issue monetary awards based on a majority vote, and the process for awarding money and the identities of the recipient could be kept private, according to sources.
Any remaining funds would be turned back over to the government shortly before Trump leaves office, sources said.
This appears intended to set up a formal process to award money to folks like Mike Flynn and Ashli Babbitt’s family without the need to file a lawsuit to obtain a settlement. The former’s prosecution and the latter’s shooting were both done during the first Trump administration and so could not be considered Biden administration weaponization, I guess.
Notes
It seems pretty clear that the claim is barred by the SOL without even getting to the merits. ↩︎
At least Hunter Biden (blatantly corrupt as he was) stuck to grifting from private foreign businesses, rather than looting the treasury itself. See Isaac Saul’s extensive list (but not comprehensive) of the administration’s self-dealing and corruption. ↩︎
The Trump administration’s budget for FY 2026 proposes $1.4 billion in more budget cuts for the IRS, according to Bloomberg:
“The Budget proposes to streamline IRS operations utilizing technology improvements to help focus the IRS on providing high-quality customer service while ensuring the tax laws are fairly administered,” the document said. The administration also highlighted its decision to end the IRS’s free filing tool Direct File and the almost 30% workforce cuts.
Most of the roughly $9.8 billion in proposed annual funding for the IRS is divided into three buckets: $3.13 billion for taxpayer services, $4.1 billion for enforcement, and $2.6 billion for technology and operations support.
Taxpayer services was the only category with a slight increase, from $3.04 billion in 2026, while enforcement and technology saw drops, according to the appendix.
The $1.4 billion cut would be larger than the $1.1 billion cut that Congress imposed on the agency last fiscal year. But it is less than what Trump or the House Republicans proposed to cut. So, one can choose between whether the glass is half full or two-thirds empty.
The article also reports that the administration proposes to cut the Inspector General’s (TIGTA’s) budget by $27 million or 16%.
The Tax Law Center described the budget as a continuation of “this Administration’s chaotic, self-contradictory, and damaging approach to tax administration.”
House’s proposed IRS budget
The House Republicans are on the same page, naturally.
On April 16th, the House Appropriations Committee released its budget for the IRS. It would reduce the FY 2027 funding by $1.4 billion over the 2026 level, about matching the administration’s proposed cut. Most of the cuts would, of course, fall on enforcement with taxpayer services being held constant (i.e., they would eat both inflation and the augmentation from IRA funding used in 2026). Here’s how Thompson Reuters describes the proposal:
Taxpayer Services: The fiscal ’27 bill would maintain the current funding level of nearly $3.04 billion for taxpayer services. The Trump administration had asked for a small boost to $3.13 billion. The bill also maintains the combined $86 million allocations to the Tax Counseling for the Elderly Program, low-income taxpayer clinic grants, and the Community Volunteer Income Tax Assistance Matching Grants Program, and funding for the Taxpayer Advocate Service at $271 million.
Enforcement: House Republicans would cut enforcement funding to $3.6 billion. The fiscal ’26 bill had allocated nearly $5 billion for enforcement, while the Trump administration requested $4.1 billion for FY 2027. The House bill directs $35 million in funding to the Criminal Investigation Division for investigative technology.Technology and Operations: The fiscal ’27 bill boosts tech and operations funding to $3.6 billion for FY 2027, well over the $3.16 billion provided for FY 2026. The House proposal also exceeds the Trump administration’s request of just $2.6 billion. Of that, the House would set aside $1 million for “research,” and $10 million for equipment acquisition and facility construction, repair, and renovation.
As usual, any partial salvation of the revenue collection and enforcement functions will depend upon the Senate.
Consequences of cuts
On April 13, the Yale Budget lab put out an estimate of the effects of the IRS budget cuts on revenue collections. They estimate that the almost 28k reduction in employees (3,600 revenue agents) and $20 billion budget reduction, in combination, will increase the budget deficit by $861 billion over ten years. Their estimate is more aggressive than that used by CBO in its official estimates, because they include deterrence and other effects. They described this as “conservatively estimate[ing] the return to deterrence to be 2.5 times each dollar recovered directly through audits.” Not sure how they’re sure that’s a conservative estimate.
They point out the obvious that the additional complexity of many of OBBBA’s provisions and expanded data sharing (i.e., the IRS reneging on its confidentiality pledge to ITIN filers) will also have negative effects on revenues.
Plan to fire whistleblower
Tax Notes (no paywall) reports that the IRS will fire a high-profile special agent who is leading efforts to audit abuse of Puerto Rice tax incentives and Maltese pension plans. IRS Seeks to Fire Lead Agent in Malta, Puerto Rico Probes:
The IRS has begun the process of firing a special agent leading investigations into abuse of Malta pension plans and Puerto Rico’s Act 60 tax incentives, raising questions about the future of those enforcement efforts.
A source familiar with the matter indicated that Brian J. Visalli’s termination was not just expected — it was scheduled.
…
One tax professional, who spoke on the condition of anonymity, said they had heard of the agent’s pending termination and that there is a sense of relief among those representing clients in the investigations. The source added that the agent was known for holding the line.
Michael Welu, who retired from the IRS in 2022 as a fraud enforcement adviser, said that while employees at the agency normally “go after the low-hanging fruit because it’s easy,” Visalli has pursued cases against large businesses and wealthy taxpayers who cheat on their taxes.
“He’s the only one really going after the big fish,” Welu said.
…
In a statement to Tax Notes, an IRS-CI spokesperson said: “Federal law prohibits the IRS from commenting on personnel issues. What we can say is that IRS Criminal Investigation continues to aggressively pursue tax schemes involving offshore entities, Maltese pension structures, and Puerto Rico Act 60 incentives. IRS-CI continues to dedicate resources, including coordinated enforcement efforts, to address abusive tax arrangements.”
…
The development follows a Tax Notes investigation into Treasury Assistant Secretary for Tax Policy Kenneth Kies’s work on behalf of advisers’ Malta pension plans.
Before Kies joined the second Trump administration, his firm, Federal Policy Group LLC, was engaged by a company, Water Structures LLC, that offered Malta pension plans. Kies strategized with advisers about how to resist IRS efforts to curb abuse of the structures.
Trump lawsuit
Trump is in settlement negotiations on his $10 billion lawsuit against the IRS. FWIW: he ultimately controls both sides of the negotiation, so he’s negotiating with himself. And the liability (i.e., the illegal release of his tax information) was done by a contractor of the IRS that he controlled (in his first term). So, if you’re a true believer in the unitary executive theory (John Roberts, et al), this is world championship level self-dealing. I hurt myself, so I deserve compensation in an amount I will determine.
Lawyers for Donald Trump and the Internal Revenue Service are in talks to settle the U.S. president’s $10 billion lawsuit against the tax collection agency for leaking his tax returns to the media in 2019 and 2020.
In a Friday filing in Miami federal court, the lawyers asked a judge to put the case on hold for 90 days “while the parties engage in discussions designed to resolve this matter and to avoid protracted litigation.” A pause “could narrow or resolve the issues efficiently,” they added.
The White House declined to comment. The Department of Justice, which represents the IRS, declined to comment.
A delay would give Justice Department lawyers more time to address conflicts of interest posed by the case, given that Trump is suing his own government.
Justice Department lawyers report ultimately to the president, while the IRS and the Treasury Department, which is also a defendant, are part of the executive branch.
A court order in the case raises an interesting question. Judge Williams, sua sponte, expressed concerns as to whether the court has subject matter jurisdiction and appointed some blue-chip lawyers (Don Verrilli is one) from three separate law firms as amici to assist her in deciding. Since Trump is on both sides of this dispute, that seems an obvious threshold jurisdictional question: is there really an article III case and controversy here? Stay tuned, the amici’s memorandum is due on May 21st.
Bisignano and the boxer(s)
The WSJ has a story (paywall) about Frank Bisignano, the de facto head of the IRS (Bessent appointed him CEO). He’s into sports memorabilia in a big way and is in litigation over ownership of a pair of fight-worn Mohammad Ali boxing trunks (I assume that’s the analogous term to game-worn for football, baseball, and basketball jerseys):
Eric Inselberg, a sports memorabilia buff and entrepreneur, said he gave the prized gear to his former friend Bisignano years ago as collateral for a $500,00 loan. Inselberg said he settled the debt but Bisignano has nonetheless refused to return the trunks, which he estimates are now worth $800,000.
Bisignano claims he didn’t receive them, wasn’t friends with Inselberg, and the trunks are worth that much anyway.
The story casts Inselberg’s side as follows:
Inselberg, in a deposition, described Bisignano as an “apex predator” who is holding on to the shorts out of spite. “He’s vindictive,” Inselberg said. “He thinks he can do whatever he wants.”
Bisignano, he said, is a huge sports fan who spends big on memorabilia but is ashamed to admit it.
The case turns on whether and when Inselberg can prove he gave the trunks to Bisignano. The trial was set to begin in March but is delayed until September.
The story describes a tour of Bisignano’s home (a “mansion”) in New Jersey that included a “replica of J.P. Morgan’s ornate personal library as well as a urinal in a bathroom.” (IMO: weird consumption preferences + too much money.) A witness claimed to see Ali’s trunks in Bisignano’s “man cave” on the tour. The trial (assuming there actually is one) supposedly will turn on the credibility of the witness’s testimony.
None of this instills confidence in Bisignano’s personal qualities to lead and manage complicated government agencies (he’s running both the Social Security Administration and the IRS), as far as I’m concerned.
Phone service
The Center for Taxpayer’s Rights did some testing of the IRS phone service during the 2026 filing season, randomly calling the various different phone lines (>100X times) to see how long the wait times were, as well as the number of “curtesy disconnects.” This Tax Notes article (no paywall) by Nina Olson, board member of CTR and former Taxpayer Advocate, describes the results. The IRS’s own statistics show a significant decline from the 2025 filing season, which is no surprise given the agency’s staffing losses.
Olsen herself independently in early April did some checking:
In a particularly benighted (read, masochistic) effort, on Friday, April 3, I called each of the 8 lines we were testing. I spent 5 hours and 31 minutes on hold with the IRS on that day. The TAC line answered within 3 minutes, the NTA [National Taxpayer Advocate] line within 7 minutes, and the AQC [Automated Questionable Credit] line disconnected me within 2 minutes. The ACS [Automated Collection Service] business and individual lines, on the other hand, tormented me with music and messages for 2 hours and 3 minutes, and 2 hours and 1 minute, respectively.
This simply confirms what must be the obvious effects of budget cuts and chaotic personnel policies this administration has adopted. As context, it is useful to keep in mind that taxpayer services has been cut much less than other agency functions, such as enforcement, IT services, and so forth. This is bad news for the fisc.
Getting in the anti-fraud biz
On April 22nd, the IRS put out a Whistle Blower Alert (a new category of IRS alerts, I think), Report misuse of federal funds and grants. My reading of the alert suggests that the IRS is going after fraud in use of federal government grants generally, that is, not necessarily related to tax law violations or other things under the traditional purview of the IRS.
The IRS is seeking information from the public regarding the misuse, diversion or fraudulent use of federal funds and grants by tax-exempt organizations, individuals, and businesses.
To be fair, many items listed under “What You Can Report” are arguably tax law related but some are very general. For example, the first six items on the list do not appear to be necessarily related to tax-exempt orgs, over which the IRS has supervisory responsibility, or tax law matters:
False statements or misrepresentations in grant applications.
Misuse of federal funds and grants including the diversion of funds for personal use.
Self-dealing or undisclosed conflicts of interest.
Improper payments to insiders, officers, or related parties.
Failure to perform required services or deliver promised outcomes.
Falsified reporting to federal agencies.
My observation is that if “failure to * * * deliver promised outcomes” under federal grants (5th bullet) is reportable, then, some very high percentage of federal grants are likely in play. Given the stresses on the agency, putting them in this sort of open-ended business of detecting government fraud under the whistle blower statute is imprudent, at best. But I guess that’s the world the federal government is now operating in.
2026 filing stats
The 2026 filing season report statistics show the effects of OBBA, but I seriously doubt that this will bail the GOP congressional candidates out of from possible revenge by an electorate that is increasingly unhappy (according to polls) with the current state of the affairs. The average refund increased by 11.3% but the $333 amount will only go so far to cover the increase gas and other prices resulting from the Iran War, I’d guess, in most voters’ minds.
The Justice Department is struggling to decide how to respond to President Trump’s lawsuit demanding at least $10 billion from the I.R.S., as the department’s lawyers try to resolve by a mid-April deadline the profound ethical questions the case raises, according to two people familiar with the dynamic.
…
Inside the Justice Department and the White House, senior officials are in the middle of a messy and complicated debate over their next steps, according to the people familiar with the deliberations, who spoke on the condition of anonymity to describe internal discussions.
While former Justice Department officials see clear flaws in the president’s case, some Trump administration officials worry that assigning a lawyer to contest it would pose an unworkable conflict, given that such a person ultimately works for the president, according to the two people. Defending the case could also contradict a White House executive order that binds all government lawyers to the president’s interpretation of the law.
Constructive suggestions from the article’s sources include asking the court to delay the case until Trump is out of office or appointing an independent counsel to defend the case. But, of course, Trump is president and he (or his people in the WH) are unlikely to go along with that, I assume. After all, he is Trump and he obviously brought the suit expecting to win (b/c he runs the government). A good selection of the arguments for the taxpayers/public have been made in this amicus brief that was preemptively filed (when do you see that?).
The article quotes Trump’s pledge to give any of the money awarded to charity. He has a history with questionable claims about charitable contributions. Of course, his presidential library is almost certain to be set up to qualify to receive charitable contributions and would seem a likely recipient. Given the grandiose, gaudy, and tasteless plans (Miami Herald; Truth Social video), more than $10 billion might be required.
This Hill op-ed on the Trump lawsuit and related IRS issues gets it right on the policy issues, IMO. See this Jasper Cummings’ Tax Notes article (no paywall) for a careful dissection of the legal arguments raised by the complaint. The article makes it clear there are ample technical and substantiative bases for dismissing the case or finding no liability, if Trump were an ordinary defendant.
Trump Accounts
On March 31st, the IRS announced that taxpayers had signed up 4 million children for Trump accounts. Of those, one million qualified for the $1,000 federally funded deposit to the account (i.e., they were born in 2025). So, a cost to the taxpayers of $1 billion for the contribution.
Preliminary CDC data indicate that 3.6 million babies were born in the U.S. in 2025. So, about 28% of them have signed up for the free money. I’m sure participation will rise as time goes by. The money is supposed to be deposited on July 4th.
The JCT estimate (over $3 billion/year) during the pilot phase when federal deposits are made looks to assume well over a 50% participation rate. Will be interesting to see what the ultimate participation rate is. I’m sure the program will spawn some interesting economic studies.
No decline in quality of tax court advocacy
Despite the budget cuts, layoffs, and revolving leadership carousel, the chief judge of the Tax Court, Patrick Urda, says the IRS lawyers are continuing to do well per Tax Notes podcast:
I have seen only outstanding lawyers by the IRS. It’s the same quality of lawyers that I’ve seen all along. . . . The advocacy remains consistent with what I’ve seen over the past eight years.
My instinct is the effects will show up in the long term, one way or the other – at least in the numbers and types of cases that are litigated, if not the quality of the advocacy. You’re whistling in the dark, if you think otherwise. We’re lucky that the chief counsel lawyers are in the IRS and not part of DOJ, for whom the quality of advocacy has clearly suffered.
a self-described anti-fascist movement fomenting sophisticated, organized campaigns of targeted intimidation, radicalization, threats, and violence designed to silence opposing speech, limit political activity, change or direct policy outcomes, and prevent the functioning of a democratic society.” It goes on to assert that this requires a law enforcement strategy to “all participants in these criminal and terroristic conspiracies.
Based on summaries (i.e., I did not read the whole lengthy thing), NSPM-7 does not grant expanded enforcement authority but rather seeks to use existing law enforcement agencies, like the FBI, to target these groups and entities.
Section 2(j) of the memorandum drafts the IRS in this effort:
The Commissioner of the Internal Revenue Service (Commissioner) shall take action to ensure that no tax-exempt entities are directly or indirectly financing political violence or domestic terrorism. In addition, where applicable, the Commissioner shall ensure that the Internal Revenue Service refers such organizations, and the employees and officers of such organizations, to the Department of Justice for investigation and possible prosecution.
Who knows what will come of this, but a NY Times story (3/19/2026) reports (buried in a graph near its end) that the FBI is close to reaching an agreement with the IRS to implement NSPM-7. Stay tuned.
Bye to Bessent
The Treasury Secretary is no longer the acting commissioner, since the duration limit for an acting commissioner was reached. But per the IRS announcement this is a distinction without a difference:
In accordance with the Federal Vacancies Reform Act, the Secretary retains the authority and responsibility to perform the functions and duties of vacant Treasury offices that are not filled on an acting basis. The IRS continues to operate without interruption, with Chief Executive Officer Frank J. Bisignano successfully leading day-to-day operations and reporting directly to the Secretary.
I have seen nothing in the media about the possible appointment of a Senate-confirmed IRS commissioner. This, of course, is consistent with the administration’s preference (dating back to Trump 1) for the flexibility of acting commissioners. Unlike the situation with U.S. Attorneys, there is no pesky statute and federal district court judges making trouble for them.
Bye to basis shifting reporting
In further unraveling of the tax compliance measures, the IRS filed a notice of its intent to revoke the Basis Shifting TOI regulations. These Biden era regs required partnerships to report when they transfer properties and basis within affiliated partnership groups. This was intended to curtail basis shifting tax shelters whereby a property’s basis is used more than once by essentially the same business to shelter income from taxation.1
WaPo has a story (Trump plans to revoke Biden tax rule that cracked down on big business abuses3/7/2026) covering the notice:
If enacted, the Trump administration’s proposal would mean that large business partnerships no longer need to tell the IRS when they shift assets from one corporate entity to another. Those transactions, called “basis shifting,” have allowed businesses to dodge tens of billions of dollars in taxes, the Treasury Department alleged in the past, by illegally depreciating the same asset over and over again.
“My concern is that people will take this as a substantive conclusion that these transactions are okay,” said Stuart Rosow, a partnership tax attorney. Rosow said that he and other lawyers who handle complex partnerships’ taxes stopped looking for the transactions to report to the IRS last year, when the Trump administration initially signaled that it would repeal the reporting requirement.
Multimillion-dollar partnerships and their lawyers had been lobbying against the rule from the moment the Treasury Department announced it.
…
The Biden administration took a three-pronged approach. With Friday’s proposal by the Trump administration, published in the Federal Register where it will require public comment before taking effect, two of the prongs are gone.
The first was a requirement that businesses report certain transactions to the IRS, so that the government could detect illegal basis shifting. That’s what Friday’s proposal revokes.
The second was an increase in audits of partnerships. Partnerships have exploded in popularity as a structure for the most profitable and complex businesses — the number of partnerships with more than $10 million in assets grew 70 percent in the 2010s, to 300,000 in 2019. Over that same time, the IRS went from auditing almost 4 in every 100 partnerships each year, to just 1 in 1,000.
The Biden administration pledged to reverse that trend, hiring hundreds of new auditors. Danny Werfel, the IRS commissioner whom Trump replaced before his term was up, said that those new auditors noticed inappropriate basis shifting right away, leading the IRS to focus on that loophole.
But the IRS workforce has shrunk drastically under Trump. In the first months of his term, more than a quarter of the agency took buyout offers or otherwise left their jobs.
That leaves only the third prong still in place — a ruling by the IRS that basis shifting is illegal if its only purpose is tax avoidance.
In a closely watched case, Otay Project LP v.Commissioner of Internal Revenue, the U.S. Tax Court ruled last week that a California housing developer illegally deducted more than $700 million in income by using transactions between parties, which the court called “engineered.” Experts viewed the decision as a victory for the Biden-era interpretation of the law — that transactions must have “economic substance” beyond mere tax avoidance.
This seems like a big deal, except it pales in the context of everything else that is going on.
GAO Report on 2025 filing season
GAO issued a report reviewing the 2025 filing season, which it found went as well as 2024 based on the usual performance metrics. That likely occurred because IRS staff essential to the filing season were spared DOGE layoffs and were prohibited from taking the deferred resignation or early retirement options until after April 15th. The naysayers a year ago who predicted a large drop in revenues as a result of IRS staff cuts were wrong. As usual, temporizing and using IRA funds saved the day. That may not be the case in 2026, but there isn’t a sign of failure so far. Degradation and slow decline rather than outright collapse are the more typical patterns. Repeatedly predicting doom is like the boy crying wolf.
Some excerpts from the report:
In addition, in December 2025 amid implementing the One Big Beautiful Bill Act (OBBBA), an IRS internal report stated that critical technology systems would not be ready for the 2026 filing season start. It also stated that return processing and customer service functions would enter the season undertrained or understaffed, which could result in errors and poor service for taxpayers.
,,,
IRS designated almost all filing season probationary staff as critical. As a result, [only] 14 of the 7,315 probationary employees whom IRS terminated in February 2025 were filing season staff. In May 2025, IRS informed managers that all previously terminated probationary employees were reinstated and should be returned to a full-work status. IRS data show that, as of December 2025, 60 percent (4,419) of these probationary employees either did not return to IRS or separated through the deferred resignation programs. [Me: so the reversed DOGE layoffs still resulted in 60% of the employees leaving!]
,,,
IRS continued to use overtime to perform post-filing season operations and account for lost staff, according to IRS officials. … IRS officials told us that more filing season staff were required to work overtime than in previous post-filing season periods and that staff who did work overtime were working more hours.
Staff reductions may limit the Service’s ability to prevent fraud in refundable credits:
The unit that provides oversight for refundable credits and prevents and detects tax-related identity theft fraud faced challenges due to staff separations and short time frames to implement OBBBA provisions that impact refundable credits in 2026. IRS’s internal reporting stated that junior staff were performing job duties of senior staff who accepted deferred resignations and that many training-related activities were suspended during the shutdown. As a result, IRS might be less prepared to identify and mitigate potentially fraudulent activities that could jeopardize taxpayers and IRS operations.
The appropriation for taxpayer services in fiscal year 2026 was $3 billion (up from $2.8 billion in FY 2025), but short of the $3.6 billion request. The 2025 appropriation was supplemented by IRA funds, but the prospect of doing that for 2026 is much reduced:
IRS reported spending $1.2 billion in IRA funds for taxpayer services in fiscal year 2025. … Treasury estimated that in fiscal year 2026 IRS would obligate $100 million of the remaining IRA funds appropriated for taxpayer services. If this projection is actualized, it could result in a significant decrease in resources for IRA-funded initiatives. IRS officials told us that the agency may use more than $100 million in IRA funds for taxpayer services because IRS needs $3.8 billion for taxpayer services in fiscal year 2026, which is approximately $800 million more than it received in annual appropriations.
Notes
It is worth noting that similar arrangements were at the heart of the disputes between the Trump businesses and the IRS or that they underlie his ability to avoid paying taxes for multiple years – including Trump International Hotel and Tower in Chicago. I have not seen that that dispute has been resolved, but I assume it will go away permanently. ↩︎
Two cases are working their way through the federal courts challenging the Memorandum of Understanding (MOU) between the IRS and DHS to allow sharing of return information for immigration enforcement purposes (prior posts: here and here).
The DC Court of Appeals upheld the MOU in the first case. It rejected the contention that the MOU was contrary to the statutory authority to share return information (specifically the current address of the taxpayer) under the federal criminal enforcement exception. Centro de Trabajadores Unidos v. Bessent (D.C. Cir. 2026). It also rejected the argument that the IRS’s reversal of its policy was arbitrary or capricious because the agency did not follow the APA procedures. This case has received little media coverage and is a facial challenge to the MOU. Because of that, it is unclear what if any effect it will have on the other case which challenges the actual practices the IRS has used in disclosing information to DHS.
In that case as I previously described, the district court the IRS implemented the MOU in a way that violated the law. That decision is on appeal and the district court’s order stayed. But in the meantime, the district court has issued an order stating it would supplement the record if it still had jurisdiction of the case – based on the IRS’s subsequent admission that it violated the statute by disclosing data to ICE in response to requests that were legally incomplete or insufficient. (The court left to the Court of Appeals whether this allows the plaintiffs to conduct discovery while the case is on appeal.)
The ruling finds that DHS did not follow this law. The judge wrote that the vast majority of the nearly 47,300 taxpayer addresses the IRS shared with Immigration and Customs Enforcement in August were disclosed without the IRS confirming that ICE provided a valid address for the person whose records it was seeking.
“The IRS violated the [Internal Revenue Code] approximately 42,695 times by disclosing last known taxpayer addresses to ICE … without confirming that ICE’s request set forth the ‘address of the taxpayer with respect to whom the requested return information relate[d],’” the judge’s opinion stated.
My guess is that on appeal the MOU will be upheld but the IRS will be required to actually follow its terms, which means that DHS will need to (1) supply an address for the undocumented individual that matches an address the IRS had (if not the current one) and (2) the individual must be under criminal investigation, for the IRS to provide the current address. I wonder in how many of the over million submission it made, ICE actually met requirement (2) since many immigration violations are civil in nature (e.g., overstaying a visa).1
Another WaPo story (2/11/2026) reveals the IRS released confidential tax data to DHS before it had entered the MOU:
Before the agreement was struck down, DHS requested the addresses of 1.2 million individuals from the IRS. The tax agency responded with data on 47,000 individuals, according to court records.
When the IRS shared the addresses with DHS, it also inadvertently disclosed private information for thousands of taxpayers erroneously, a mistake only recently discovered, said the people familiar, who spoke on the condition of anonymity for fear of retribution.
Unauthorized disclosure of tax return information entitles the taxpayer to $1000 in damages for each disclosure, which the WaPo article alludes to. I.R.C. § 7431(c)(1)(A). I wouldn’t worry too much about the administration revealing to the victims that their information was disclosed or paying them the damages they’re entitled to (I’m not as confident about Treasury resisting paying the Trumps, though, for the disclosures to ProPublica).
Meta litigation – new transfer pricing enforcement tactic?
Jesse Drucker reports, I.R.S. Tactics Against Meta Open a New Front in the Corporate Tax Fight (NY Times, 2/24/26), that the litigation over Facebook’s transfer pricing reveals that the IRS is attempting to use a new technique to fight transfer pricing abuse in which (typically) big tech and pharma companies artificially shift US profits to foreign tax havens.
Excerpts from the story:
A multibillion-dollar dispute between Meta and the Internal Revenue Service is signaling a major shift in how the agency targets tax dodges used by big companies that push profits offshore.
After years of struggling to stop firms like Amazon, Microsoft and Coca-Cola from shifting trillions of dollars to island havens, the I.R.S. is deploying new legal tactics in a court battle with Meta, the owner of Facebook and Instagram. If successful, some tax advisers say, the agency could recover hundreds of billions in taxes from multinationals.
…
I.R.S. auditors have been pursuing Meta for about a decade, contending the company lowballed the price of trademarks, customer agreements, software licenses and other rights it moved offshore. Their new argument is based on Meta’s overseas profits since then: They say the company failed to report roughly $54 billion in income and owes nearly $16 billion in back taxes and penalties.
…
When Meta moved those rights offshore, its Irish unit agreed to pay its U.S. parent about $6 billion for those rights. In theory, that amount equaled the future profit that Meta expected to generate in most overseas markets attributable to the various technologies and business lines already developed in the United States.
Now the I.R.S. is pointing to the reality that, in the years since 2010, Meta earned tens of billions more than its projections.
US multinational corporations (MNEs) artificially convert US/domestic income to foreign source/low taxed income by transferring IP (patents, trademarks, etc.) to subsidiaries entities domiciled in low-tax foreign countries for an agreed upon price under a cost sharing agreement (CSA). The MNEs then pay royalties or other compensation to the foreign entities resulting in foreign-source income. That arrangement only works (i.e., artificially converts domestic to low-taxed foreign income) if the CSA undervalues the IP relative to those subsequent payment flows. That, of course, is routinely what happens.
The IRS is stuck in an asymmetrical arrangement in the setting of this value – the company certainly knows more about the profit potential of the IP and it has a strong incentive to undervalue the IP in the CSA. The IRS, according to the article and this chief counsel memo, is now asserting that the second sentence of I.R.C. § 482 and the regs (probably more important) allow it to revisit that value if actual profits (i.e., the payments for the IP) prove it to be too low. The statutory language seems ambiguous, although the JCT Bluebook and the regs support the newly asserted IRS view.2
My take: Will this survive the court’s textualist review of the statute and regs, post-Chevon? I would not bet much on it. If the IRS persists and its approach is upheld (two big IFs), it will likely be truly revolutionary. But it will take years to play out and will be a boon to state corporate taxes if IRS prevails. Loper Bright means that not much deference will be given to the regs, which also seem ambiguous.
Congress could improve federal oversight of paid preparers by granting IRS authority to establish professional standards for paid preparers and security requirements for IT systems of paid preparers, as we previously recommended.
I didn’t see any new information in the report (i.e., beyond what prior GAO research had uncovered) about the systematic errors unregulated paid preparers make (i.e., those other than enrolled agents, licensed CPAs, and so forth). I guess it’s good to remind Congress of this issue. Of course, we all know they won’t do anything. The courts struck down prior efforts by the IRS to regulate preparers without legislation and the potential climate in the courts and Congress for that is even worse now.
TIGTA reports
TIGTA reports (2/6/2026) that the IRS is making very little progress in digitizing tax returns (p. 8 of pdf):
Contractors were only able to scan 517,000 (5 percent) of the 9.8 million paper-filed Forms 940, 941, and 1040 received during the 2025 Filing Season as of May 2025. Similarly, the interim ZPI contractor only scanned approximately 425,000 (7 percent) of the 5.7 million paper-filed Forms 940, 941, and 1040 received from May 19, 2025, through August 9, 2025. Two factors affect the volume of tax returns that contractors can digitize: 1) the contractor’s ability to hire sufficient staff, and 2) the IRS’s ability to timely provide required clearances to contract staff, once hired.
This does not look good for the zero-paper initiative. It may explain the plan to outsource scanning for the 2026 filing season to contractors. I wonder if that too will run into the snag of slow processing of clearances for contractor staff, thwarting it as well.
Onboarding of employees hired under the IRA funding did not look to go well according to this February 19th Report with many the new hires not getting laptops and statements of what they were expected to do on the job:
Based on the results of a sample we reviewed, we estimate that 7,505 (40 percent) of the 18,901 employees hired in FY 2024 received their laptop more than 5 workdays after their start date. Without their laptop, an employee cannot effectively perform their work. For example, a tax examining technician may be unable to review and analyze internal documents and taxpayer returns, one of their major duties. (p. 7)
…
Based on the results of our sample, we estimate that 8,253 (44 percent) of the 18,901 employees hired in FY 2024 did not receive their CJE [critical job elements] form within 30 calendar days of their start date. When managers delay the discussion and completion of the CJE form, the employee may not clearly understand the supervisor’s expectations and the level of performance needed to achieve a specific rating. (p. 9) [notes omitted.]
Almost half of a billion dollars in erroneous recovery rebates were paid out to more than 300K ineligible individuals according to a February 23rd TIGTA report. Most of the money ($317 million) went to 225,028 nonresident aliens (i.e., helping other countries recover from the pandemic?). The next largest category ($177 million) were payments to people who had already received the payment. This does not help build confidence in the agency – of course, it was under enormous pressure to quickly get these pandemic payments out.
Staffing crunch hits
Government Executive reports on the reassignment of IRS employees to deal with the filing season and it does not sound good:
The Internal Revenue Service is asking seasoned employees without any direct tax experience to perform entry-level tasks of answering phones and processing tax returns, a step impacted staff call unprecedented as the agency scrambles to prepare for filing season.
The reassigned workers, who are being detailed out on an involuntary basis, are coming from the IRS human resources and, potentially, the IT departments. Some employees reported that supervisors first asked for anyone who had experience in the front-line fields to consider the roles, but they ultimately chose many individuals with no prior experience working directly on tax issues.
…
The divisions in IRS that process tax returns and provide telephonic and in-person customer service, as well as other duties related to filing season, have lost 8,300 workers, or 17% of their staff, the IG found.
The IRS division tasked with processing original and amended tax returns has hired just 50 employees in anticipation of the 2026 filing season, or 2% of its authorized level. It can take up to 80 days to train new employees, the IG said, meaning employees hired now may not be ready to assist during filing season at all. Accounts Management, which handles IRS customer service, has hired just 66% of the filing season employees for which it has been authorized.
The IG warned the shortfalls could lead to delayed returns and slow service for taxpayers in the upcoming season and said the impacts have already been felt. Tax return backlogs were still elevated as a result of the pandemic, the IG said, but have soared higher due to staffing losses in IRS. The total now stands at 2 million, up 33% from a year ago.
…
One employee whose office is sending staff to fill the details noted it has never backfilled after the deferred resignation program and the temporary details would therefore have an outsized effect on efforts to fulfill normal duties. Another employee said the entire ethics team, with the exception of one person, is being detailed to taxpayer services.
“They are leaving one person to deliver ethics training for the entire agency,” the employee said. “It’s an impossible task for one person.”
The same worker added employees in charge of recruiting and hiring are being detailed out, making it more difficult for IRS to bring on the staff the IG said it is failing to hire.
Notes
That would be bad news for encouraging undocumented individuals to file returns. But that effect of data sharing pales by comparison to likely effect of ICE ‘s enforcement tactics on any kind of cooperation with the federal government by undocumented individuals, including filing and paying taxes. ↩︎
The language requires the two amounts of income to be commensurate. Whether that allows periodic revaluations or adjustments in light of actual later income flows is the issue. ↩︎
President Trump, his sons Don Jr and Eric, and his business sued the IRS for $10 billion in damages to compensate for the illegal disclosure of his tax returns to ProPublica and the New York Times. To put the $10 billion in context, Forbes (9/18/25) estimated Trumps’ net worth as $6.3 billion.1
If he were a typical taxpayer, this would be a legit lawsuit that could result in the government paying damages.3 The law explicitly allows for these suits and provides for liquidated damages of $1,000/incident and reasonable attorney’s fees.4 The Trumps suit seeks punitive damages, of course.
For example, Ken Griffin, a hedge fund guy, sued over disclosure of his returns in the leak. The case was settled with an apology. As Tax Notes (no paywall) reports, unlike the Trumps, Griffin “did not allege that the IRS’s failure to appropriately safeguard his return information caused him pecuniary harm.”5 The Tax Notes story also notes that the IRS notified about 70,000 individuals that their information was involved.6
The following make the Trumps’ lawsuit especially unusual (among many others that make it merely unusual):
All presidents and major party nominees, except Trump, have voluntarily disclosed their tax returns to the public. Tax Notes archive. The one exception (Trump) is now claiming that involuntary disclosure caused him and his family massive reputational damage and entitlement to punitive damages.
The leak of his return information occurred while he was President and while his appointees were in charge of the Treasury Department and the IRS. One might say he was somehow responsible for the leak indirectly, the unitary executive and all that jazz. (I know, it’s just a highfalutin constitutional theory about authority and power, not accountability or legal liability.) And the conduct was so bad that punishment (i.e., punitive damages) should be meted out, the most important effect of which would be to line the pockets of the guy in charge. Translation: I or my appointed underlings made mistakes in supervising this rogue contractor who criminally released confidential tax return information. Please punish that conduct by giving me billions of dollars!7
Whatever one thinks of that theory, he and his appointees are now in charge. So, he will directly (unitary executive again) or indirectly be deciding whether to pay himself, his family and business and how much. That is a bit of a conflict, to the say the least. In the context of Trump’s administrative claims for damages related to the federal criminal cases, he allowed that it was “it’s awfully strange to make a decision where I’m paying myself.”8
A natural question is whether equitable defenses, like estoppel, laches, unjust enrichment and so on, will be available to the government. Probably not for liability based on a statute with exemplary damages. Of course, that assumes the more important question of whether DOJ will be allowed to contest the case at all and if doing so (e.g., some sort of damage formula in a “settlement”) will somehow be binding on the government for claims by others with clean hands and real harm to their reputations.
Of course, there is a plethora of commentary and pushback. A tiny sampling:
WaPo editorial (note that the new configuration of WaPo editorial board appears to be more of a WSJ editorial board wannabee than the old WaPo editorial board): “Public officials trying to dictate the amount of their own private payouts is a bad look.”
Motion to file an amicus brief filed by four former tax officials including John Koskinen and Nina Olson, Common Cause, and Project on Government Oversight – this is the most comprehensive lists of potential issues with the lawsuit that I have seen. It validated my instinct that there must be a statute of limitation issue with the suit. I think all of their overarching four requests for court actions make eminent sense to me.9
When I checked Bloomberg’s list of billionaires (2/8/2026), Trump did not crack the top 500 (cutoff was $7.43 billion). Logically, one could argue that the tax return disclosures adversely affected his net worth (i.e., more than cut it in half or something like that), justifying the damage claim. That, of course, is ridiculous. He was reelected after the disclosure and his reelection vastly increased his net worth, if only based on outright or quasi-grifting. See, e.g., the NYTimes or the CAP accounts of a tally of how that has occurred. ↩︎
Note that the suit is filed in the southern district of Florida. I assume the Trumps were hoping to draw Aileen Cannon one more time. No such luck, the case was assigned to Judge Kathleen Williams, an Obama appointee. ↩︎
I.R.C. § 7431 authorizes suits for damages for violations of I.R.C. § 6103. The damages for “willful inspection or disclosure” are the greater of actual damages or liquidated damages of $1k per incident. Punitive damages, which the Trumps’ lawsuit requests, are allowed but appear to apply only if the grant is based on actual damages. (Punitive damages are the only way you can get to $10 million IMO, much less $10 billion.) The inspection and disclosure were made by a contractor who admitted it was done intentionally. So, the “willful” requirement for punitive damages under the statute is likely met. I don’t know if his contractor status affects the government’s liability. I.R.C. § 7431(a)(2) authorizes suits against an individual who discloses your return information but who is not an officer or employee of the government. That is what occurred here. Other suits have been filed against the contractor, Boaz Allen & Co. Whether the ability to sue contractors protects the government from liability or just adds another liability target is unclear. ↩︎
This is one instance where the statute cuts against Trump, his sons, and business. Entitlement to attorney’s fees is not allowed to individuals whose net worth exceeds $2 million or $7 million for a business. 28 U.S.C. § 2412(d)(1)(B). Notwithstanding that, the complaint (¶ 114) requests attorney’s fees. Getting to the limit in § 2412(d)(1)(B) requires following two cross references that start in § 7431(c)(3). ↩︎
An obvious question is whether the settlement would allow him to refile if DOJ and IRS agree to pay the Trumps a lot of money? ↩︎
The complaint (¶¶ 78 and 80) asserts that this IRS notice was what caused Eric and Don Jr. to discover the violations. Gee, were they on safari or under a rock since the news stories ran in 2023? There must be an issue of the SOL running. I didn’t bother to research the SOL, but the amicus brief referenced at note 8 makes a good case that the 2-year statute has run. ↩︎
The actual perpetrator (Mr. Littlejohn, the Boaz Allen & Co. contractor) is serving a 5-year term in prison. Criminal punishment is the strongest deterrent of conduct by his likes, the direct disclosers of return information. Thus, any deterrent effect of punitive damages (here they would be paid by the government, not Littlejohn or Boaz Allen) must be directed at the people who supervise and manage the direct perpetrators, i.e., higher level officials in the IRS, Treasury, and White House. ↩︎
At least, in that case he was only asking for $230 million. Of course, that claim was made before he won, and we all know elections have consequences. ↩︎
The requests: “First, the Court should consider issuing an order for the parties: to show cause why this Court has jurisdiction over this case, to explain how they will address the fundamental conflict-of-interest problems with this case, to show why this case should not be stayed until after President Trump leaves office, and to show why the unjustified $10 billion damage figure should not be stricken from the pleadings. Second, the Court should consider appointing amici who have expertise on issues of tax law and separation-of-powers issues to present fulsome legal arguments on all future issues that arise in this case. Third, the Court should consider allowing participation of those amici in hearings. To treat this case like business as usual would threaten the integrity of the justice system and the important taxpayer and privacy protections at the heart of this case.” ↩︎
President Trump sued the Internal Revenue Service on Thursday for the unauthorized leak of his tax returns during his first term, demanding that the government agency pay him at least $10 billion.
Mr. Trump, as well as his two eldest sons and his family business, charged in the lawsuit that the I.R.S. and the Treasury Department had failed to prevent a former I.R.S. contractor, Charles Littlejohn, from gaining access to Mr. Trump’s tax documents, which were shared with The New York Times.
Mr. Littlejohn is serving a five-year prison sentence for taking tax documents about Mr. Trump and other wealthy Americans and giving them to news outlets. While federal law closely guards tax information, Mr. Trump, with the lawsuit filed in federal court in Florida, is now seeking billions in damages for the disclosures.
Mr. Trump appointed the leaders of the I.R.S. and Treasury Department, setting up the possibility of Mr. Trump’s aides deciding how to respond to a lawsuit brought by the president. Mr. Trump has previously demanded that the Justice Department pay him about $230 million in compensation for the federal investigations into him, a request that had no parallel in American history.
Leadership Shakeup
On January 20th, WaPo reported (link) on yet another reorganization of IRS leadership and that the agency was leaning into relying on IT and is outsourcing some processing functions to the private sector (my emphasis added):
The Internal Revenue Service will reorganize its senior ranks days before this year’s tax filing season opens and try to use technology to become more efficient, the Trump administration’s IRS leader Frank Bisignano told The Washington Post on Tuesday.
…
Bisignano said the tax service was well-positioned ahead of the coming filing season but needed to more aggressively lean into technology, including initiatives pushed by the now-defunct U.S. DOGE Service to reduce staffing.
“We’re constantly investing in technology. We constantly must reap the rewards of it. And quite often we don’t, because someone isn’t willing to let go of those two people,” he said. “ … I’m not at all feeling that we don’t have enough staff. I just think it’s a way people think that is obsolete.”
,,,
Bisignano on Tuesday unveiled a new leadership team at the agency that will see 16 C-suite executives report to him, including a new chief of criminal investigations and the IRS’s acting chief counsel.
The agency will jettison its former standards that measured and tracked performance on taxpayer helplines. Bisignano said previous metrics that tracked access to customer assistance representatives were opaque and distracted from the agency’s mission of helping solve taxpayers’ problems. It will instead gauge average speed of answer at call centers, call abandonment rate and time spent on the line, he said.
The agency will also outsource some of its paper return processing operations, including using private contractors to scan and digitize tax returns. The IRS has long been burdened by paper processing. Hard copy returns make up a fraction of the agency’s correspondence, but they take exponentially longer to process than returns filed electronically.
DOGE officials had pitched fully privatizing those initiatives. Bisignano said the IRS would have a “hybrid” public-private digitalization process, saying he was wary of outsourcing too much of that work.
“I’m fundamentally DOGE,” Bisignano said, “and what I’ve meant by that is I’ve driven efficiency and quality my whole career.”
Last filing season, playing musical leadership chairs did not seem to matter. Let’s hope that holds. Governments heavily relying on technology solutions (hello, ACA) has not typically turned out well.
Privatizing digitizing paper returns seems like yet another opportunity for data breaches. (The ProPublica leak was from a contractor working for Booz Allen. Treasury has cancelled its contracts with Booz Allen in response.) I assume that this means the end of IRS staff keying in numbers off paper returns.
This AP story has some additional interesting details about the leadership changes:
In a letter addressed to the agency’s 74,000 employees and viewed by The Associated Press, Chief Executive Officer Frank Bisignano announced new priorities and a reorganization of IRS executive leadership.
Notably, Gary Shapley, the whistleblower who testified publicly about investigations into Hunter Biden’s taxes and served just two days as IRS Commissioner last year, was named deputy chief of the Criminal Investigation division. Guy Ficco, the head of Criminal Investigation, is set to retire and will be replaced by Jarod Koopman, who will also serve as chief tax compliance officer alongside Bisignano.
Joseph Ziegler, another Hunter Biden whistleblower, was named chief of internal consulting, the letter said.
For those of you who don’t pay as close attention to this stuff as I do, Shapley was kicked to the curb in a dispute between the current acting commissioner, SecTreas Scott Bessent, and then de facto DOGE head, Elon Musk. This is from a 4/18/2025 Politico story:
President Donald Trump is replacing the fourth IRS chief this year amid complaints by Treasury Secretary Scott Bessent that he was not consulted on the appointment after Elon Musk recommended the person, according to a White House ally and a Trump administration official familiar with the dispute who were granted anonymity to discuss private conversations.
Bessent also ousted a prominent member of Musk’s DOGE team assigned to the IRS, after a major staff reduction was set in motion at the agency.
Gary Shapley, an IRS criminal investigator and whistleblower in the Hunter Biden tax case, was tapped by Trump only days ago to temporarily lead the agency.
However, according to the people familiar with the situation, Shapley was installed largely at the request of billionaire Musk, and Bessent was left completely in the dark about the decision.
Bessent expressed his frustration outside the Oval Office on Thursday and made it clear he wanted someone he could trust to lead the IRS, according to the administration official.
Soap opera screen writers could be writing this script. Let’s hope agency leadership really isn’t important. Scott Bessent alone provides plenty of that sort of fodder (e.g., throwing down the proverbial glove in disputes with other administration officials). So, the volatility should be expected.
Relying on IT
Regarding the idea of leaning into technology as the solution, this story from the Federal News Network reports 1,000 IT staff were reassigned to other functions (in addition to the IT staffing reductions reported by National Taxpayer Advocate):
The IRS is moving about 1,000 IT employees out of its tech shop, as part of a reorganization plan that’s been underway for months.
Impacted employees say they have few details about what work they’ll be doing, and have been told by the agency to instead “focus on completing an orderly transition of your current work.” The notice they received last week states that they will no longer be working on IRS IT projects.
According to the notice, obtained by Federal News Network, the reassignments will go into effect on Dec. 28.
…
Last month, IRS IT directed hundreds of its employees to complete a “technical skills assessment.” According to two IRS IT employees, the test, conducted by HackerRank, consisted of several multiple-choice questions and a coding question that made up the majority of the overall grade. One employee said the questions “had zero to do with our jobs.”
“They did this to say, ‘Look, 98% of our people failed, so we are going to move you or RIF you,’” the employee said.
Sam Corcos, Treasury’s chief information officer and a Department of Government Efficiency representative, defended the IRS layoffs as “painful” in a recent podcast interview, but said they were a necessary tool to get the agency’s stalled IT modernization efforts back on track.
…
“We’re in the process of recomposing the engineering org in the IRS, which is we have too many people within the engineering function who are not engineers,” he said.
“The goal is, let’s find who our engineers are. Let’s move the people who are not into some other function, and then we’re going to bring in more engineers,” he added.
In March, the IRS removed 50 of its IT leaders from their jobs and put them on paid administrative leave. Corcos defended that decision, saying the IRS “has had poor technical leadership for roughly 40 years.”
During the interview, Corcos said the layoffs in the federal government are more restrictive than what’s allowed in the private sector. In practice, he said government RIFs often result in agencies losing younger employees with in-demand skills, but with less tenure — something he said should be corrected.
None of this instills confidence.
Dumb defunding
The temporary budget patch has expired, so Congress needs to come up with something if the government is to reopen. The House’s shot at this is HR 7148 – Consolidated Appropriations Act, 2026 (a different version passed the Senate). Of course, Congressional Republicans are still trying to unravel Biden’s appropriation increases for IRS operations and tax compliance. The last iteration of this in HR 7148 (the enforcement money will be effectively gone). The results are predictable – lower spending and much lower revenues. This note (c on p. 2) from the CBO estimate of the budget effects of HR 7148’s cuts to the IRS are eye-opening (my emphasis added):
Section 528 wouldrescind $11.7 billion of amounts provided to the Internal Revenue Service in the 2022 reconciliation act (P.L. 117-169). CBO anticipates that rescinding those funds would result in fewer enforcement actions over the next decade and thus in a reduction in revenue collections. CBO estimates that section 528 would reduce revenues by $2.7 billion in 2026, by $25.6 billion over the 2026-2030 period, and by $38.6 billion over the 2026-2035 period.
So, the government will lose over $3 of revenue for each dollar of the spending cut. Brilliant budgeting. This is some combination of weird ideology, stupidity, listening to the wrong people, and bad governance. The adverse effects will also filter through to state and local governments with income taxes. That’s on top of the systematic undermining of the Service’s operations that are otherwise occurring.
A dire view of the House-passed IRS budget comes from the NYU Tax Law Center blog (my emphasis):
“The appropriations agreement’s record cuts in the IRS base budget and nearly $12 billion rescission of funding for IT upgrades guarantee a worse taxpayer experience and more non-compliance. However, by expanding transfer authority, the agreement would give the Trump administration greater flexibility in using the appropriated funds and potentially allow it to paper over the severity of the cuts in the near term, even as the cuts set the IRS up to fail in future administrations.
The agreement cuts base IRS funding, including enforcement, by over one-third relative to its 2010 level, adjusted for inflation. It rescinds more than half of the Inflation Reduction Act funds remaining, and at current spending rates the remainder would almost certainly be exhausted during the current administration.”
Graph from Tax Law Center showing the effect of the changes in a longer-term context:
Status of IRA funding increase
The Bipartisan Policy Center put out a piece on the 2026 filing season, which is worth reading if (like me) you’re into that sort of thing. It contains a nice graph on the status of the IRA increase in funding:
This misleadingly assumes that the roughly $12 billion rescission in HR 7148 has been enacted. Versions of it have passed the House and Senate but needed to be resolved as part of the shutdown negotiations. But it almost surely will happen, which means the expanded funding of enforcement is all but toast. Sigh.
They write letters (on CI)
Congressional letters to the executive branch are a time-honored way of making political points. The pertinent topic now is immigration enforcement, of course. The Dems wrote a couple on that topic that relate to the IRS Criminal Investigations (CI).
The first (dated 1/22/2026) is to five inspectors general, including the IRS’s inspector general. The letter requests that they evaluate whether federal law enforcement resources have been diverted “toward advancing President Trump’s immigration enforcement agenda[.]”
With regard to IRS CI, the letter cites media sources, which I had not seen, as reporting:
More than 1,700 IRS Criminal Investigation employees have been reassigned to ICE as of September 2025, compared to just 250 employees as of June 2025.9 In April 2025, the IRS and DHS formalized a data-sharing Memorandum of Understanding granting ICE access to certain taxpayer return information — including names, addresses, and tax years — to support immigration enforcement, a potentially unlawful departure from the longstanding IRS confidentiality policy,10 and potentially further drawing from IRS resources.
None of the specific questions (see pp. 7-8) the letter poses specifically relate to IRS CI. We’ll have to stay tuned to see if a forthcoming report verifies the extent to which CI agents and resources have been reassigned to immigration enforcement.
I wonder how Secretary (acting IRS commissioner) Bessent’s dispatching CI to Somalia (or at least to investigate funds sent there) will be treated in responding to this. Ignored, I assume. Bessent made these comments in Minnesota FWIW.
Another letter (dated 1/28/2026) from some of the same members to Bessent requests responses to ten questions (p. 4) on the reduction in CI investigations, staff, resources, and the extent to which this is from reassignment to immigration matters. The letter (p. 1) says CI’s annual report (I haven’t seen it) documented:
[I]nvestigations into abusive tax shelters plummeted 63 percent last year to a level roughly 40 percent below every other year in the past decade. As one former head of the shuttered Justice Department Tax Division put it, “There is a usual ebb and flow, but you can’t ignore this number.” [footnotes omitted]
About your retirement package
Tax Notes has this story (no paywall) about IRS employees who took the early retirement (the “fork email”) offer:
Some IRS employees who participated in the deferred resignation program have yet to receive annual leave or annuity payments, with no clear answers for the delay.
Anthony Marasco, who spent nearly 30 years at the IRS, took the second deferred resignation offer and retired effective September 30, 2025. Along with several other recently retired IRS employees, he’s still waiting to receive his annual leave payout and his first annuity payment — months after leaving the workforce.
Marasco said a representative from the IRS Employee Resource Center told him in early December 2025 that the agency was sitting on a backlog of about 7,300 retirement applications and that he should expect to wait about six to nine months before receiving his first annuity payment.
…
From January through June 2025, 17,562 IRS employees participated in the second round of the deferred resignation program, according to the national taxpayer advocate’s midyear report.
More than 20,000 employees took part in both rounds of the program, which was launched as part of the Trump administration’s efforts to drastically reduce the size of the federal workforce.
Another recently retired IRS employee, who spoke to Tax Notes on the condition of anonymity, said the delays have likely been exacerbated by staffing cuts in the agency. The IRS Human Capital Office lost nearly 29 percent of its staff through June 2025, mostly through the deferred resignation program.
“I’ve been in contact with other retirees. We all took the September 30th date . . . we haven’t seen a dime,” the former employee said.
2025 was not a good time to be a federal employee or even to take a seemingly generous early retirement offer. I hope they lined up good private sector or state and local government jobs or have federal pensions that are being paid.
TAS annual report
On 1/28/2026, the Taxpayer Advocate Service released its annual report. As usual, the report is full of interesting information and useful suggestions on how the Service could improve. It gives the IRS good grades on the 2025 filing season but cautions about 2026 filing season, given the dramatic reduction in IRS staff (see table below) and the complex OBBBA provisions which apply retroactively to tax year 2025 (the press release, e.g., cites 8 qualifying rules for the new car loan interest deduction). Here’s the table documenting in IRS staffing cuts:
TPC/Brookings webpage
The Tax Policy Center and Brookings have a new IRS Spotlight webpage that they promise to regularly update with tax administration news. It has a lot of interesting graphics and data.
Those of us who have been around forever remember multiple failed efforts to modernize the IRS or virtually any large government IT system, much of which are written in dead programming languages like Cobol and Fortran.1 MN DOR was slightly better IMO and now has relatively up-to-date computer systems, at least for individual income tax administration (corporate, I’m less sure).2
A recent acting IRS commissioner (one of many) in an AICPA webcast suggested that AI may change that dynamic. AI has many failings (I have personally experienced its tendency to make up stuff multiple times), but writing computer code is supposed to be one of its strengths. In any case, here’s a description of what former acting commissioner Michael Faulkender said in that regard:
When asked how close the IRS was to modernization of its computer systems, Faulkender replied:
“I will give you the same line that I gave a number of times when I was acting commissioner. For 35 years, the IRS was five years away from its IT modernization. We will not say that in the 36th year. The plan was to get it done by the end of this term, so by 2028.”
Faulkender, who was deputy Treasury secretary and acting IRS commissioner for several months in 2025, said modernization of the IRS IT systems previously focused on taking millions of lines of computer code in languages like Fortran – developed in the 1950s – and translating them into more modern languages.
But now, artificial intelligence can reprogram the old code, said Faulkender, who also was an assistant Treasury secretary from 2019 to 2021. “So maybe humans don’t know how to program in those languages anymore, but AI does know how to program in those languages, so we actually don’t need to update code that actually works,” he said.
I hope he is right, but think he is overly optimistic, if not outright delusional. See e.g. this Harvard Business Review article. In any case, real people with experience still need to carefully review, test, and edit the AI-generated code. Software that determines people’s tax liability and other critical stuff is not something you can leave to AI. Moreover, the IRS IT staff has been decimated and undoubtedly has many other critical tasks to perform. Overconfidence in AI has been a mark of this administration (DOGE and all that stuff). So, consider me highly skeptical.
Trump accounts
The IRS has released guidance on Trump Accounts (44 pages; I only read the general overview), enacted as part of OBBBA.3 These accounts are yet another flavor of the IRA structure with, of course, its own set of special rules. The interesting element is that the federal government will contribute $1k for every child born in 2025 through 2028 (assuming the parent or guardian opt in – a big assumption for some). If the kid lives in the right zip code, Michael Dell or Ray Dalio might kick in more. Employers can contribute up to $2,500/year for children of their employees without it counting as income of the employee. Parents and others can contribute as well.4
A couple of curiosities I discovered in reading this. The IRS guidance delays the ability to make additional contributions to the plan until the country reaches the 250th anniversary of the Declaration of Independence:
Contributions to Trump accounts cannot be made before July 4, 2026. (p. 5)
I guess that tracks with signing OBBBA on July 4, 2025. It also raises questions in my mind about the basis for making decisions and how much of it is PR-centric. Not the way I think government should work.
Second, the government website for Trump accounts has this graphic at its top:
What’s odd about it is that eligible investments for Trump Accounts do not include individual stocks, such as those displayed in the graphic. Per page 5 the IRS guidance (or I.R.C. § 530A(b)(3)):
During the growth period, funds in a Trump account may be invested only in eligible investments. An eligible investment, generally, is a mutual fund or exchange traded fund (ETF) that tracks an index of primarily U.S. companies, such as the Standard and Poor’s 500 stock market index, does not use leverage, does not have annual fees and expenses of more than 0.1 percent of the balance of the investment in the fund, and meets other criteria that the Secretary determines appropriate.
The PR flacks creating this stuff should talk to people who know about the substance of the programs they are promoting. But that is probably too much to expect from this administration which appears more concerned about image than substance or truth.
Who’s a socialist?
Cato has an article about the administration’s state corporatist policies. If (as I am) you’re concerned about this, it’s useful reading. It’s easy to forget or miss just how many instances of this have occurred in less than a year of this administration.5 This graphic collects instances (not comprehensive IMO) in which the administration took government stakes or is in negotiations to do so in private companies:
There were a lot. It’s easy to forget.
I find this ironic for a candidate and a party that regularly accuses the Dems of being radical left socialists and occasionally communists. These policies are more insidious than anything mainstream Democrats would dare to do IMO. They are categorically harder to justify (for a free market type like me) than most classic Western European democratic socialism policies. Most of those policies are Bismarckian social safety stuff that are useful, if not essential, to maintain modern market-driven developed societies; voters in democracies insist on them.
By contrast, the administration policies of extracting public stakes in private firms in return for regulatory approvals seem categorically different. The impacts of Mamdani’s policies (A few government grocery stores or free bus rides?) pale by comparison.
Hosts of limited government advocates (Club for Growth, Americans Prosperity Alliance, WSJ editorial board, and their ilk) made an explicit tradeoff of ignoring Trump’s total lack of support for democratic principles, presumably, because they judged the horrors of the potential Dems policies’ limits on economic freedom to be worse. State corporatism is what they opted for. That says something about their priorities and their ability to assess political reality (the nature of and probability of policies being implemented). More likely a case of their revealed preferences.
Notes
Disclosure: Fortran is one language that I was able to read and understand (well, most of the routines). I did a modest amount of basic Fortran programming back in the 20th century. The basic calculations of the federal government’s individual income tax microsimulation model (p. 26) appear to still be written in Fortran. ↩︎
When DOR implemented a new IT system, we researchers expected it would be hugely disruptive and that we would lose access to some data that was irrelevant to tax administration. ↩︎
Yet one more example of appending Trump’s name to random stuff to buff his ego. ↩︎
I personally think that 529 Plans are a superior savings vehicle to pay for college and other education costs. That’s another post, though. ↩︎
The article really does not track the use of merger approvals as a way to effectively extract tribute from private businesses or more ominously to neuter critical media, like CBS or CNN potentially with the Netflix v. Paramount fight over Warner. ↩︎
The Service has announced the 2026 filing season will start on January 26th. The big question is whether reductions in IRS staffing, including the departure of over 20% of its IT and customer service staff (p. 5), and enactment of OBBBA provisions affecting tax year 2025 (no tax on tips and overtime, car loan deduction, etc.) will cause a breakdown.
The Service is on its seventh commissioner with Scott Bessent serving as acting commissioner for an apparently indefinite period of time. In addition to the challenges of being the Secretary of the Treasury, he appears to be easily distracted – e.g., into using the IRS to chase down rumors1 that seem a bit removed from typical Service activities (whether admitted fraud proceeds went to a foreign terrorist group). The head of the Social Security Administration – a challenging job in its own right – is acting as chief executive and will be in charge of day-to-day operations. Not sure how much comfort that provides.
IRS apparently has reversed course and will be hiring seasonals rather than permanent customer service employees, according to Bloomberg. That should make recruitment more difficult, I assume.
Last year everything went remarkably well with similar but different issues at the top and impending chaos for those in the ranks. But the bar is a bit higher this year and staff who were kept on for the filing season are gone.2 So, who knows. I wouldn’t hold my breath and would not file a paper return if I could avoid it.
Flagging audits
Meanwhile, NYTimes reports, not surprisingly, that the number of audits of large partnerships in 2025 was down significantly from 2024:
Since President Trump returned to office, nearly all the senior leaders of the [large partnership audit] operation have left the I.R.S. — taking the newly acquired partnership tax expertise with them. Audits have been abandoned, they have decreased in number and the initiative is foundering.
Progress on complex audits has slowed to a trickle, tax lawyers who specialize in these cases said. The number of large partnership exams has not gone “completely to zero, but it has certainly dropped 80 or 90 percent,” said Gary Huffman, a tax lawyer at Vinson & Elkins who represents partnerships that are being audited. A lawyer who handled roughly 15 such audits in 2024 reported only three in 2025. Another who advised clients on four such audits in 2024 saw zero new audits in 2025.
…
“We were having good success bringing into the I.R.S. seasoned tax and legal expertise to help with complex audits, including for large partnerships,” said Danny Werfel, who served as I.R.S. commissioner for the final two years of the Biden administration. “Because these folks were relatively recent hires, they were probationary employees. When all probationary employees were let go, lots of talent walked out the door.”
…
Profits reported by partnerships exploded to $2.6 trillion by 2022, from $267 billion in 2000, the most recent I.R.S. data shows. Profits reported by traditional corporations grew at about half that pace.
…
With no one left to look for the dodges, tax experts warn that abusive shelters are likely to proliferate.
A recent study by a team of business and law school professors at schools including Stanford, the University of Georgia, New York University and the University of Chicago found that audits of complex partnerships had a “high return on investment,” generating $20 in collected taxes for each $1 spent by the I.R.S. That return is over eight times what the I.R.S. generates from auditing corporations, the researchers found.
Doing large partnership audits seems to me to have a higher cost-benefit payoff than seeing if the Feeding Our Future fraud moneys made their way to al-Shabab. Discovering that the latter occurred would obviously be bad, but the payoff would largely be partisan political scalps, rather than internal revenues.3 That’s world we live in.
Notes
Per Fox News: “Bessent said Friday [1/8/2026] that the Internal Revenue Service (IRS) Civil Enforcement is auditing financial institutions that allegedly supported the laundering of Minnesota funds, and that the IRS is planning to unveil the ‘formation of a task force to investigate any fraud and abuse involving pandemic-era tax incentives and misuse of 501(c)(3) tax-exempt status by entities implicated in the Minnesota based social services fraud schemes.’” ↩︎
IRS employees with filing season responsibilities were prohibited from taking the Fork Email early retirement. ↩︎
I’ll be surprised if Bessent’s inquiry results in criminal charges or sanctions on financial institutions for money laundering. ↩︎
SALT Speak - Joel Michael's Blog 