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.
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. ↩︎
Reuters used data extracted from Westlaw from 1990 on. This year is an all time low as shown in this graph from the story:
The story reports some interesting and troubling details about what is going on (in addition to the dramatic reduction in IRS staffing and shuttering of the DOJ Tax Division). Some excerpts:
The administration made deep cuts to the Internal Revenue Service’s criminal investigative unit, and some of those who remained were ordered to start working on immigration cases or anti-crime patrols in Washington, according to government records and officials, speaking on the condition of anonymity because they were not allowed to discuss their work publicly. At the same time, the Justice Department closed its Tax Division, and officials said a third or more of the criminal lawyers who worked there quit.
…
Reuters used federal court dockets to count the number of Justice Department attorneys who appeared on behalf of the government in tax prosecutions between January and the beginning of November. Last year, about 420 did. This year, about 160 have.
Top Trump administration officials told prosecutors early this year that tax investigations were not a priority, three people familiar with the discussions said, speaking on the condition of anonymity to discuss the department’s internal deliberations. Participants concluded that the department’s new management was “very skeptical about white-collar crime and whether we should be doing those cases,” one person familiar with the discussions recalled.
…
At least a third of the roughly 80 criminal prosecutors who worked in the office [DOJ Tax Division] at the beginning of the year quit rather than be reassigned, two officials familiar with its staffing said.
…
U.S. attorneys’ offices that could pick up some of that slack have also lost prosecutors with experience in white collar cases, current and former Justice Department officials said. Department records show more than 1,000 lawyers have left U.S. attorneys’ offices this year, roughly double the number who quit or were pushed out in previous years.
…
The IRS investigators who remain “are being pulled in a lot of directions,” some of which are unrelated to taxes, a former Justice Department official who witnessed the changes said. “The damage being done is significant.”
In Washington, the new responsibilities for IRS investigators have included conducting patrols alongside city police officers as part of a show of force Trump ordered this year to combat what he called a crisis of crime in the capital city.
The IRS’ office in Washington initially sent only a few of its roughly 60 agents to assist with those patrols. But after Trump aide Stephen Miller complained, the office upped that amount to more than 20 agents to patrol the streets, two people familiar with the deployment said.
Good grief is all I can say to 20 IRS agents assigned to patrol the streets of Washington DC. These people are not serious about running a government. The pattern squares with multiple inexplicable pardons of white collar and tax criminals, as well as a president who views aggressive tax avoidance (to the edge of evasion) as smart.
The Treasury Department sent a letter last week to conservative influencer Erika Kirk with findings that contradict fraud allegations about the finances at Turning Point USA and could help her refute those claims, sources told CBS News.
Questions were being raised on social media about the finances at Kirk’s organization, Turning Point USA, and podcaster Candace Owens and others were urging donors to demand refunds. That led a few of its small-dollar donors to ask for their money back, one of the sources said. Erika Kirk runs the nationwide conservative college student organization co-founded by her late husband, Charlie Kirk.
…
The letter said none of the four tax-exempt entities Kirk now runs — Turning Point USA Inc., Turning Point Action Inc., Turning Point Endowment Inc., or America’s Turning Point Inc. — are being examined by or are under investigation by the IRS, and all of the entities “submitted on time” all their 990 forms to the IRS this year. Contents of the letter were shared with CBS News.
Asked about the swift response to aid the conservative organization’s efforts to combat the social media rumors, a senior Treasury official said: “The IRS is able to provide this type of information upon request by the taxpayer. And in this case, it’s hideous that malicious lies and smears obligated her to make the request.”
That’s a service I had never heard of the Service offering.
This post consists of excerpts from and my comments on five media stories related to the IRS that appeared in November. They’re in chronological order, not how I assess their importance.
What I had assumed would occur now is official, the IRS is ending (“suspending”) the direct file program under which the government itself provides software to calculate and file your income taxes. (The Free File program by private software firms and fill-in PDF forms – no tax calculations – will continue, though.) The IRS did not announce it but sent an email to the state tax agencies according to the Federal News Network (11/5/2025). The New York Times story has more detail.
This seemed certain to happen given the views of GOP members of congress and the conclusion of the Treasury Department’s mandated report on it:
Direct File had low overall participation and relatively high costs and burdens on the federal government, compared to other free filing options. . . . Direct File’s complexity and technical demands also diverted IRS resources from other core priorities. Meanwhile, successful, longstanding programs, such as Free File (which already covers a broader eligibility population than Direct File and operates at little cost to the government), were not fully promoted or optimized during this period.
The report estimated a cost of $138 per return without taking into account indirect costs.1 Scale economics and long-term fixed costs suggest the per return cost would drop over time and as its usage increased (marginal per return cost had to be very low). Free File’s asserted broader eligibility is questionable. It likely reflects the more limited geographical reach of Direct File until more states could come on board. Direct File had much higher income eligibility than Free File ($200K v. $84k for Free File).
I have mixed feelings about this, but my take is that the software firms who provide Free File services are inherently conflicted (their business model is to sell the software, not to give it away) and I lean toward the government bearing the cost of basic preparation and filing. Software is virtually essential now, given the complexity of the code. (Thank you, Congress.) Providing free software to do the calculations is similar to providing paper forms in days of a simpler code without income phase-outs, an AMT, and similar. (People would not have been pleased if the IRS charged for tax forms, while allowing low-income people to get them free from the IRS’s printer.) It’s analogous to a sales tax credit for retailers to offset some of their costs of collecting the sales tax for state and local governments.
Giving away tax base
I have discussed before how the IRS for various reasons undercuts the revenue intended to be provided by legislation (usually offsets to fund GOP tax cuts or Dem tax cuts or spending increases). Sometimes, that is a matter of practical necessity (e.g., delay of expanded information reporting for gig workers, now repealed), fear of popular/political blowback, and in other cases is simply inexplicable (allowing pass-through entity level taxes to avoid the SALT deduction limits). Even if the concessions are contrary to the letter of the law and intent of Congress, rarely does anyone have standing to and the wherewithal to challenge them.
The NY Times published a story (How the Trump Administration Is Giving Even More Tax Breaks to the Wealthy, 11/8/2025) that mainly focuses on undercutting the new corporate alternative minimum tax or CAMT, enacted to offset the cost of Inflation Reduction Act (a/k/a Biden’s infrastructure bill).
It’s hard to tell from the article what the agency’s rationale was for the various dilutions of the CAMT and other provisions. CAMT, of course, undercuts the investment incentives in TCJA and OBBBA (see this Brookings piece, e.g.). So, undercutting it will further the administration’s and GOP Congress’s agenda. But that certainly is no justification. Moreover, as the article points out, it is done without accounting for the cost, as enacting actual legislative changes would and is sure to increase the deficit materially. The changes are permanent features, in most cases. The article quotes speculation that hundreds of billions may be involved. Hard to judge the quality of such speculation, but it seems credible.
Most troubling is that the article asserts the crypto industry is a big beneficiary of the concessions. That’s an industry that adds little social value (as far as I can tell) and is the subject of some of the most lucrative grifting by Trump and his family, along with other administration insiders (like David Sacks) in other contexts.
The Treasury Department and Internal Revenue Service, through a series of new notices and proposed regulations, are giving breaks to giant private equity firms, crypto companies, foreign real estate investors, insurance providers and a variety of multinational corporations.
The primary target: The administration is rapidly gutting a 2022 law intended to ensure that a sliver of the country’s most profitable corporations pay at least some federal income tax. The provision, the corporate alternative minimum tax, was passed by Democrats and signed into law by President Joseph R. Biden Jr. It sought to stop corporations like Microsoft, Amazon and Johnson & Johnson from being able to report big profits to shareholders yet low tax liabilities to the federal government. It was projected to raise $222 billion over a decade.
…
“Treasury has clearly been enacting unlegislated tax cuts,” said Kyle Pomerleau, a tax economist at the American Enterprise Institute, a right-leaning think tank. “Congress determines tax law. Treasury undermines this constitutional principle when it asserts more authority over the structure of the tax code than Congress provides it.”
The alternative minimum tax isn’t the administration’s only effort to roll back taxes on large businesses and wealthy individuals. Last month, the Treasury and I.R.S. granted new tax relief to foreign investors in U.S. real estate. In August, they withdrew regulations to prevent multinationals from avoiding taxes by claiming duplicate losses in multiple countries at once. And, as The New York Times previously reported, the Treasury and I.R.S. have rolled back a crackdown on an aggressive tax shelter used by big companies, including Occidental Petroleum and AT&T. That amounts to another $100 billion in cuts — and likely far more, according to tax advisers.
…
The Treasury’s actions are probably contributing hundreds of billions of dollars to the federal deficit, tax experts said. That is on top of the trillions that the legislation signed by Mr. Trump in July is already adding to the deficit. Yet unlike laws passed by Congress, Treasury is under no obligation to publicly account for revenue lost by its actions — such as cutting spending to offset the money no longer being collected.
Opting crypto out of the CAMT:
The [CAMT] could have swept in two of the biggest crypto firms, Coinbase and Strategy. In response, they sought rule changes for calculating the minimum tax. Three high-powered legal advisers — Michael Desmond, who served as the I.R.S. chief counsel in the first Trump administration; Andrew Strelka, formerly senior tax counsel in the Biden administration; and Eugene Scalia, the labor secretary in the first Trump administration — pushed to exempt “mark to market” gains reported to investors. Those gains reflect the increase in value of the investments held by companies that haven’t been sold yet.
On Sept. 30, the I.R.S. granted their request, explicitly citing “digital assets.” Big crypto companies “have been granted a reprieve,” lawyers at Vedder Price wrote.
Monte Jackal as characterizing the changes as an effective repeal of the CAMT. (Seems a bit over the top to me.)
Conflicts at the top
The IRS commissioner position has been a revolving door under the Trump administration. We’re on the seventh commissioner or acting commissioner, when you include Danny Werfel, Biden’s commissioner who left shortly after Trump was inaugurated. Scott Bessent, the Treasury Secretary, is now acting commissioner.
Before becoming Treasury Secretary, Bessent was a hedge fund guy. He was a principal at Key Square Group. The NY Times published a story that revealed his old hedge fund has taken the position that limited partners who are actively involved in working for or managing the partnership (as Bessent was) do not need to pay Social Security and Medicare (SECA) taxes on their non-guaranteed partnership distributions. The I.R.S. Tried to Stop This Tax Dodge. Scott Bessent Used It Anyway (11/12/2025).
The IRS (the agency Bessent now directly heads) takes the position that these limited partners are not limited partners (i.e., passive investors) who are exempt from the SECA taxes on their nonguaranteed payments.2 In its view, these limited partners are garden-variety partners who must pay SECA taxes on their non-guaranteed payments. (The statute explicitly exempts the guaranteed payments.) The IRS won a Tax Court case on this issue in 2023, which is on appeal.
This tax minimization strategy is analogous to the more publicized use of S corporations to shield pass through entity income from full SECA taxation. Multiple high-profile politicians have used this gambit – John Edwards, Newt Gingrich, Joe Biden, and many more. Broadly closing off these strategies would raise a lot of revenue and is one option (indirectly through subjecting them to the NIIT) I suggested to fund the Dems’ proposal to continue the more generous ACA credits.
The story reveals that Bessent did not appear troubled by the fact that he has and is taking a tax position contrary to the agency he now manages. According to the Times story:
Mr. Bessent has stood by the tax maneuver. During his confirmation process to lead the Treasury Department, which oversees the I.R.S., Mr. Bessent said he would not follow the I.R.S. position that limited partners like him owed those self-employment taxes.
Instead, he said he wanted to see how ongoing legal challenges would pan out. He pledged to create “a reserve fund to address any contingency related to this issue” and said the amount in question was smaller than the $910,000 described by Democrats. He also committed to winding down his hedge fund.
Tax experts quoted by Times do not agree. (I can attest to Professor Burke’s bona fides. She was formerly a U of M law professor, and I took a week-long partnership course from her. She is a national expert in partnership taxation.)
“There’s zero question that this is abusive,” Walter D. Schwidetzky, a law professor at the University of Baltimore who focuses on partnership taxes, said of the ability for business owners to avoid self-employment taxes through limited partnerships. “No one of good faith would argue otherwise.”
…
“What surprises me is that there’s a precedential Tax Court opinion that Scott Bessent seems to say, ‘That’s not good enough for me,’” said Karen Burke, a tax law professor at the University of Florida who has written about the limited partnership exemption.
The Biden Administration had a regulation project to explicitly foreclose claiming the exemption, but the Trump Administration appears to have dropped it. The article notes that the staff turmoil at the agency and DOJ (in addition to Bessent’s public statement, I suppose) may undercut the government’s litigating position on appeal:
The U.S. government continues to defend the I.R.S. position in court, but it is now doing so with a weaker hand, tax experts said. The Trump administration has moved to disband the Tax Division at the Justice Department, which represents the I.R.S. in appellate court, and many tax lawyers in the department left amid the turmoil there, former officials said. One of the lawyers who represented the I.R.S. in the Fifth Circuit case involving the limited partner question, for example, withdrew from the case and left the government this year.
“The proposed restructuring of the Tax Division will not impact the ability of its civil litigators and criminal prosecutors from advancing its mission to fairly and consistently enforce the nation’s tax laws,” a spokeswoman for the Justice Department said.
The I.R.S. has lost not only much of its overall staff, but much of its leadership, too. Several of the agency’s top officials focused on tax enforcement have been pushed out, put on leave or quit.
This is just another (comparative mild) example of questionable ethical behavior by administration officials and a seeming lack of concern about defending the tax base.
MAGA mugging
Trump nominated Donald Korb to be IRS chief counsel. I thought this to be a modestly bright spot in an otherwise dark picture for the agency. Korb served in George W. Bush’s IRS as chief counsel, as well as a few other IRS roles before that. He is a respected tax lawyer with a long career, a typical conservative normie Republican. The Senate Finance Committee had recommended his confirmation.
Well, it was not to be. He’s out. Per Politico (11/14/2025):
President Donald Trump abruptly withdrew Donald Korb’s nomination for IRS chief counsel on Friday.
While Trump didn’t explain his decision, right-wing political activist Laura Loomer reposted Trump’s announcement on her X account, along with the hashtag “#LOOMERED.” Loomer, who’s sidelined several administration officials, chastised Korb on Wednesday for praising Democrats and donating to them.
I regard that as unfortunate depending upon who his replacement is. The leak by Senator Wyden regarding Korb’s questionable comments in a private meeting with Finance Committee staff and his public comments on the data sharing agreement, as reported by Tax Notes (no paywall), suggested to me that Korb might be in trouble with the MAGA types and was trying to pander to them. Loomer is a whacko, whose targets are impossible to predict (much less whether Trump acts on them). Who knows why a typically below the radar appointment like IRS chief counsel would attract her attention? This is not good, anyway you view it.
ICE data sharing case decided
The federal district court for DC has decided the IRS data sharing case that I previously blogged about here, granting a stay and a preliminary injunction of the data sharing policy. Links: to court’s memorandum and WaPo story (11/21/2025).3
The court accepted the plaintiffs’ arguments on the address issue and the rejected the government’s position that one or a few ICE employees could be “personally and directly engaged” in criminal investigations of thousands of individuals for which data was requested. The court likely thought that was simply not possible for one or two people to do that, because being personally engaged requires more than a cursory paper check as the government asserted.
The court’s memorandum, in deciding the agency had taken final, reviewable action describes how extensive IRS’s actions were:
Plaintiffs’ factually uncontested allegations show that the IRS spent an unknown amount of money developing the capability to conduct mass transfers of taxpayer information; entered into an agreement with ICE to conduct mass transfers of confidential taxpayer address information; and then completed a mass transfer of confidential taxpayer address information to ICE pursuant to this agreement, all while removing high-level individuals who disagreed about the disclosure process. This marks the consummation of the IRS’s decision-making process. page 40.
The IRS, according to the court’s memorandum, committed multiple violations of the statute in one instance in which it provided ICE with information for 47,000 individuals:
In sum, Plaintiffs have shown that the IRS committed multiple violations of Internal Revenue Code Section 6103(i)(2) when it disclosed confidential taxpayer address information to ICE on August 7, 2025. The IRS’s disclosure of address information for 47,000 taxpayers to a single individual at ICE violated the requirement in Section 6103(i)(2)(A) that the IRS disclose taxpayer information only “to officers and employees of [a requesting] agency who are personally and directly engaged in” a criminal proceeding or investigation. Furthermore, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(i) because the IRS disclosed thousands of taxpayers addresses to ICE without first confirming that ICE provided the “address of the taxpayer with respect to whom the requested return information relate[d].” In addition, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(iv) because the IRS disclosed taxpayer information to ICE even though ICE’s request for disclosure did not adequately set forth the “specific reason or reasons” why taxpayer address information was relevant to a criminal proceeding or criminal investigation under 8 U.S.C. § 1253(a)(1). Finally, the IRS’s August 7 disclosure to ICE violated Section 6103(i)(2)(B)(ii) because ICE’s June 27 request failed to provide “the taxable period or periods” to which its requested taxpayer information related. pages 62-63 (citations omitted).
Regarding the substance of the apparent new address sharing policy:
In sum, Plaintiffs have shown a substantial likelihood that the IRS’s implementation of the Address-Sharing Policy was both arbitrary and capricious and contrary to law. The IRS failed to acknowledge its change in policy and failed to provide a reasoned explanation for its implementation of the Address-Sharing Policy. Furthermore, in implementing the Address Sharing Policy, the IRS failed to consider significant reliance interests that were endangered by its prior policy. Finally, Plaintiffs have shown a substantial likelihood that the Address-Sharing Policy is contrary to the requirements of the Internal Revenue Code. Plaintiffs have therefore made an adequate showing of likelihood of success on the merits as to the Address-Sharing Policy to support a preliminary injunction.
If this is the face of the new IRS, it’s ugly.
The WaPo story says no decision has been made on appeal, but I’m certain it will be, given the administration’s history and the importance it assigns to generating high deportation numbers. Whether this small victory for taxpayer privacy holds is anyone’s guess.
Notes
The New Jersey Department of Revenue, by contrast, estimated that taxpayers who used the system saved $153 per return, as reported by CNET. Not materially different, given New Jersey is a comparatively high-cost state. ↩︎
The story reveals Bessent paid the full Social Security tax, which has a modest income cap, currently $176,100. Obviously, his guaranteed payments exceeded that threshold for each of the years. ↩︎
The memorandum is quite a read WRT the background of the changes in IRS data sharing practices. ↩︎
One of Trump’s dumb tax ideas1 that Congress codified in OBBBA is an exemption for tip income. Congress, as it often does, punted the details of which occupations qualify to the Deep State (i.e., the IRS).
Axios is out with a story that reports that the IRS will release proposed regulations that designate the qualifying occupations. The list looks consistent with my expectation of which jobs are generally tipped, except:
Home Electricians
Home Plumbers
Home Heating/Air Conditioning Mechanics and Installers
Maybe I’m just a cheapskate or miser, but I have never considered tipping a plumber or electrician. I recently had a new furnace installed and did not tip the two HVAC installers. I should check with Phil Krinkie, one of my old tax chairs who runs an HVAC company, to see how often his employees get tips (maybe they don’t disclose it to their employers?). Maybe it’s a regional thing?
Insider trading
A recent study published on SSRN by three University of Florida accounting professors has some troubling findings about potential insider stock trading by IRS employees. Here’s the abstract:
We investigate the information content of personal stock trades by IRS officials. We collect transaction-level data on over five thousand IRS officials’ personal investments and document substantial trading activity in individual stocks by officials across IRS departments. We find that IRS officials’ trades, predominantly their purchases, generate positive abnormal returns on average, consistent with officials’ information being not yet fully impounded into stock price. Next, we examine whether stock trades by these officials are associated with the firm’s future tax enforcement outcomes. For a given firm, we find IRS officials’ purchases are associated with subsequent decreases in tax reserves and specifically lapses in the statute of limitations. We also find that IRS officials’ sales are associated with subsequent unfavorable tax settlements. These findings suggest that IRS officials possess, and trade on, material tax-related information and that these trades are associated with future tax enforcement outcomes for firms.
A slightly longer and more readable description than the abstract, written by the authors, was published in the Milken Review.
I haven’t carefully read the study, but it looks statistically sound. As a policy problem, insider trading by IRS employees probably pales in comparison with stock trading by members of Congress based on their nonpublic access to information. But it should be addressed by the Service, both as a matter of probity and to maintain public confidence in tax administration. I’m sure doing so in an enforceable and sensible way will not be simple.
Data sharing with ICE
Litigation over the IRS sharing data with ICE for immigration enforcement is ongoing. One case upholding the data sharing is on appeal to the DC Court of Appeals, while another is still in the DC district court.
I assumed that it was illegal for the IRS to provide addresses of ITIN filers to ICE to enforce immigration law. That is what the IRS Manual (see clause 5) says. The statute ((2)(B)(i)) says a qualifying request must include the individual’s address. A natural conclusion is you can’t make a blanket request just to get addresses by asserting an investigation of criminal immigration violations. That appears to me to be what was done here.
Well, the government’s response is that if you provide an address, you can get the current address. With an administration that increasing appears to operate in questionable faith, that would be a major opportunity for mischief. See here (pages 28 – 33) for the government’s substantive arguments as to why it complied with the statute. The case, of course, involves a host of standing and jurisdictional type arguments.
We’ll see how this turns out. I’m not optimistic that the interests of tax compliance will prevail over enforcement of immigration law.
The article also reports on congressional efforts to reign in the agency by members of Congress, which is troubling to me since I consider Larry Gibbs to be a very credible and neutral observer:
In late July, 20 House Republicans asked the I.R.S. to withdraw yet another line of attack on the transactions, one providing guidance to auditors on how to analyze the tax shelter deals.
That letter was “an attempt by elected officials to influence audits by the Internal Revenue Service of specific taxpayers,” said Larry Gibbs, who served as President Ronald Reagan’s I.R.S. commissioner. “From the standpoint of the integrity of the system, I am concerned about it. It’s politicizing the tax process.”
The I.R.S. is also turning on its own staff. Over the past several months, right-wing groups targeted the agency, accusing officials involved in the anti-tax-shelter efforts of being members of a “deep state” and biased against Republicans. The I.R.S. suspended several employees, including some who worked on the crackdowns. The highest-level official, Holly Paz, is a longtime, respected agency official who ran the division that oversees large business and was placed on leave in late July.
“Based on my experience with Holly Paz, over a number of years, she is experienced, she is professional and she has been a leader at the I.R.S.,” Mr. Gibbs said. He added, “I don’t find the attack on her to be credible.”
Notes
It’s a bad idea (policy wise, may be not politically) because it violates the cardinal tax principle of horizontal equity by favoring one type of income over others, while making the tax system less economically efficient and more complex. It encourages recharacterizing income, avoidance, and evasion. Dumb all around, even if tipped employees are a generally deserving class of potential beneficiaries of tax largesse. ↩︎
Less than two months into his stint as commissioner of the IRS, Billy Long is out and heading to Iceland as its new ambassador (assuming the Senate confirms him, as it does virtually all of Trump’s appointments). Given that he was totally unqualified for the job, that seems like a good sign to me.
Here’s an excerpt from the NY Times article that broke the story:
Billy Long, the former auctioneer and Republican congressman who was confirmed less than two months ago as head of the Internal Revenue Service, has been abruptly removed from the post by President Trump, the administration disclosed on Friday.
Mr. Long, who had little background in tax policy beyond promoting a fraud-riddled tax credit, had clashed at times with Treasury Secretary Scott Bessent during his brief tenure, three people familiar with the decision said. He also made high-profile mistakes, at one point last month telling tax practitioners that the agency’s all-important filing season would start late next year, a statement that the I.R.S. later said was premature.
A gregarious and colorful personality, Mr. Long had tried to cultivate a connection with the depleted and demoralized I.R.S. work force. He visited I.R.S. locations around the country and repeatedly sent emails to all I.R.S. employees allowing them to leave work early on Friday afternoons.
“With this being Thursday before another FriYay, please enjoy a 70-minute early exit tomorrow. That way you’ll be rested for my 70th birthday on Monday!” Mr. Long wrote to staff on Thursday.
I suspect that somebody in the administration realized that with the depletion of the agency’s staff and the challenge of implementing the myriad tax changes under OBBBA, having someone competent in charge was critical. Trying to cultivate employee morale by giving blanket time off, when the agency is facing massive and critical workload is not a good look.
A disastrous (or just bad) 2026 filing season, major glitches in implementing OBBBA, or similar would all be bad heading into the midterms, to state the politically obvious.
He was on a very short lease, according to the story, which reports that Long told colleagues he needed Treasury Secretary Bessent’s approval for “everything he did at the I.R.S. * * *.”
I take this as a good sign. But that’s like celebrating that you can salvage the toy after spilling the contents of your box of Cracker Jacks on the dirty floor. The administration has done nearly everything possible to wreck the agency. Cashiering an incompetent leader is a baby step forward. I’ll withhold my judgment until they nominate a replacement and enact a budget for the agency. It may be that the submarine’s dive has leveled off but I wouldn’t get my hopes up.
Former commissioner Koskinen had a nice quote, understated but capturing the reality, in the Times story:
“It has to be a new American record for the shortest I.R.S. tenure [for a Senate-confirmed commissioner] in history,” he said. “Obviously, he had no background in tax and no background in management. You give him a 75,000-person agency in charge of the tax code, and it is a bit of a challenge.”
The Taxpayer Advocate Service’s FY 2026 objectives report was released last week. It confirms that the 2025 filing season went well. It’s not as sanguine about the potential for next year as a result of IRS staff reductions (voluntary or otherwise). Figure 1.3 from the report shows departures by area or function, as of June 4th compared to Inauguration Day.
The numbers are dramatic with personnel down 27% overall.1 In some divisions or functions the reductions are breathtaking. I feel for the one employee left in the chief compliance officer function. (One person responsible for ensuring the agency’s compliance? The plan must be to transfer this function elsewhere.) Others with large declines are understandable. For example, direct file will end; headquarters staff departures, such as multiple acting commissioners, have been covered extensively by the national press; the DEI purge had the expected effect on Civil Rights and Compliance; etc.
The IT and Taxpayer Services units are down about the same as overall agency staffing. But these units will be crucial for the 2026 filing season. They reprogram the IT systems for each filing season, including adding all the features that enactment of OBBBA will require. (To be fair, most of OBBBA’s changes take effect for tax year 2026, which affects 2027 filings. But a material number affect tax year 2025.) I believe that personnel in those areas were prohibited from leaving (e.g., taking the fork email offer) during the filing season.
This does not bode well. Recall that there is a hiring freeze in effect because the EO specifically provided expiration of the government-wide freeze did not apply to the IRS. (My previous comments on the hiring freeze are here.) I assume it will be lifted soon. Otherwise, many waivers will need to be provided.
Here are the TAS’s recommendations on that from the report (p. xi):
I recommend the Administration lift the current hiring freeze and provide Direct Hire Authority so that Taxpayer Services can hire essential filing season employees (customer service representatives (CSRs) and Submission Processing employees) to meet taxpayer needs next year. And if that happens, it is critical the IRS hire them by the end of summer so it can onboard them, provide them with adequate training, and ensure they are prepared to assist taxpayers when the 2026 filing season begins in January. Especially in the short term, the number of total IRS employees is less important than the number of trained IRS employees.
The bad news in the report is that, despite the agency’s goals, it was unable to achieve digital processing of all paper returns for the 2025 filing season. Returns are scanned, so there is a digital image of them. But employees still need to key in much information to process paper returns. Given the cuts in funding (the administration is proposing a 37% reduction in IRS funding according to the Report (p. xi), taking into account both the reduction in appropriations and IRA funding) and employee departures, good luck with achieving end-to-end digitalization under the Zero Paper Initiative soon.
OBBBA post
On Thursday (7/3/2025), I posted some of my reactions to the One Big Beautiful Bill Act (no longer its formal popular name thanks to Senate action) but did not email it to my subscribers. It’s too long (8k+ words) to do that and I doubt anyone will want to read it anyway. I wrote as I was monitoring congressional consideration of the bill to organize my thinking and record some of my sources. But if you do want to scan or read parts of it, here’s the link.
Endnote
As a matter of context, this Tax Notes article, using IRS Data Book numbers, shows that in 2022-23 there was about a 20% turnover in IRS personnel. 27% in less than six months is high to say the least. ↩︎
Billy Long, a former Republican congressman whom President Trump has tapped to lead the Internal Revenue Service, pitched his friends on a tax credit that the agency has said does not exist, he said during his Senate confirmation hearing on Tuesday.
Many Democrats focused their questions at the hearing on Mr. Long’s history with the tribal tax credit, a supposed tax break offered by White River Energy Corp., an Arkansas-based oil and gas company. Mr. Long confirmed he had promoted the credit but said he had believed it was real when he encouraged people to claim it.
“I had no indication that they were anything but real,” he told lawmakers.
The I.R.S., responding to a request from Senate Democrats, previously told lawmakers there was no such credit. “We can confirm that these tax credits do not exist,” the agency wrote in March, adding that promoters of nonexistent credits could face criminal penalties.
* * *
The former congressman, a Republican from Missouri, was paid more than $65,000 for his work encouraging people to claim the supposed credit, according to his financial disclosure and his statements before lawmakers.
Several people who work for White River Energy Corp., as well as a host of other companies that have promoted questionable tax strategies, donated more than $135,000 to Mr. Long’s dormant campaign account this year. Mr. Long used those donations to pay himself back for a loan he had made to his failed Senate campaign in 2022, campaign finance records show.
* * *
Mr. Long did not serve on the tax-writing committee during his congressional career, though he repeatedly sponsored legislation that called for the abolition of the I.R.S. Mr. Long describes himself on social media as a “certified tax and business adviser,” a credential he received after attending a three-day course offered by Excel Empire, another tax consulting company, a spokesman for the company told The Springfield News-Leader.
It’s hard to imagine an appointee less qualified, on the basis of either expertise or character, to be commissioner of the IRS.
Mr. Walczak, a former nursing home executive who had pleaded guilty to tax crimes days after the 2024 election, submitted a pardon application to President Trump around Inauguration Day. The application focused not solely on Mr. Walczak’s offenses but also on the political activity of his mother, Elizabeth Fago.
Ms. Fago had raised millions of dollars for Mr. Trump’s campaigns and those of other Republicans, the application said. It also highlighted her connections to an effort to sabotage Joseph R. Biden Jr.’s 2020 campaign by publicizing the addiction diary of his daughter Ashley Biden — an episode that drew law enforcement scrutiny.
Mr. Walczak’s pardon application argued that his criminal prosecution was motivated more by his mother’s efforts for Mr. Trump than by his admitted use of money earmarked for employees’ taxes to fund an extravagant lifestyle.
Still, weeks went by and no pardon was forthcoming, even as Mr. Trump issued clemency grants to hundreds of other allies.
Then, Ms. Fago was invited to a $1-million-per-person fund-raising dinner last month that promised face-to-face access to Mr. Trump at his private Mar-a-Lago club in Palm Beach, Fla.
Less than three weeks after she attended the dinner, Mr. Trump signed a full and unconditional pardon.
It came just in the nick of time for Mr. Walczak, sparing him from having to pay nearly $4.4 million in restitution and from reporting to prison for an 18-month sentence that had been handed down just 12 days earlier. A judge had justified the incarceration by declaring that there “is not a get-out-of-jail-free card” for the rich.
* * *
Mr. Walczak, 55, joined his mother’s nursing home business after dropping out of college, eventually becoming chief executive. After she sold the company in 2007, they invested $18 million in a new nursing home venture based in South Florida, where they lived a luxurious lifestyle.
By 2011, prosecutors said, Mr. Walczak had stopped paying employment taxes.
Between 2016 and 2019, they said, he withheld more than $10 million from the paychecks of the nurses, doctors and others who worked at his facilities under the pretext of using it for their Social Security, Medicare and federal income taxes. Instead, he used some of the money to buy a $2 million yacht and to pay for travel and purchases at high-end retailers, including Bergdorf Goodman and Cartier, prosecutors said.
The justification for the pardon is the similar treatment of Hunter Biden:
[A] a pardon application was submitted on Mr. Walczak’s behalf. It suggested that Donald Trump Jr., as well as Ms. Guilfoyle and other Trump allies, supported his clemency.
They all agreed, according to the application, that the only reason Mr. Walczak was prosecuted criminally was that he was the son of a prominent Trump supporter.
The application cited Mr. Biden’s justification for issuing a sweeping pardon to his son Hunter Biden for tax and gun crimes in December. The elder Mr. Biden had claimed in a statement that Hunter “was singled out only because he is my son.”
If bad motivation of the prosecutors justifies pardoning someone, one’s ability to impute or imagine possible motives is the only limit on the pardon power. And imagining someone had it in for you for all the wrong reasons is easy enough, I’d guess. This Times story from today reporting on yet another pardon also involving tax crimes is yet more evidence for that:
President Trump will fully pardon the reality television stars Todd and Julie Chrisley, who were convicted three years ago of evading taxes and defrauding banks of more than $30 million to support their luxurious lifestyle.
* * *
A jury in 2022 found the couple guilty of eight counts of financial fraud and two counts of tax evasion, while Ms. Chrisley was convicted of additional counts of wire fraud and obstruction of justice. Mr. Chrisley received a 12-year prison sentence, and Ms. Chrisley was sentenced to seven years. [The appeals court vacated her sentence.]
* * *
Mr. Little wrote that their conviction “exemplifies the weaponization of justice against conservatives and public figures, eroding basic constitutional protections.” His summary connected the prosecutors in the Chrisleys’ case to Fani T. Willis, the Georgia state prosecutor who brought an election interference case against Mr. Trump in 2023.
Savannah Chrisley, a supporter of Mr. Trump, said in a speech at the Republican National Convention last July that her parents were “persecuted by rogue prosecutors” because of their public profile and conservative beliefs.
The fact that they defraud banks of $30 million wasn’t the real reason. It was the weaponization of justice against conservatives.1
See here for another transparently abusive use of the pardon power in a nontax context that was in the news over the weekend.2
Notes
One theory is that Trump feels empathy for reality television stars who commit fraud and evade taxes, based on his personal experiences (Trump University, etc.). ↩︎
The pattern here and with the Walczak pardons is rewarding political supporters. ↩︎
until morale improves or the IRS accepts its mission to carry out the whims of the guy who issues executive orders and directives like this.
The post-Watergate IRS that I have known for all my career appears to be a historical artifact. In addition to stripping the agency of much of its funding and many employees, the administration obviously intends to use the IRS to help execute its nontax policy agenda (e.g., deportations, remaking woke educational institutions, or whatever), punish enemies, and reward friends.
Using the IRS for those sorts of activities was supposed to be off-limits under laws enacted after Watergate revealed Nixon had surreptitiously ordered the Service to do similar stuff. Unlike Nixon, the current crew apparently sees no need to hide its intent and plans.
This NY Times article provides some general background on the history of misusing the IRS going back to FDR (it was the Bureau of Internal Revenue or BIR back then). Interestingly with regard to FDR, the article does not mention the failed criminal prosecution of former Treasury Secretary Andrew Mellon.1 This old (from the archives) Christian Science Monitor article provides more historical examples of using the IRS and BIR power to punish enemies. The first example shows Mellon began as an abuser before ending up as a target. I had not realized that the Kennedy administration went after the John Birch Society and other right-wing groups, as the article says.
The IRS could see a mass exodus of up to 40 percent of its workforce through a combination of buyouts offered by the Trump administration and widespread layoffs, according to an internal memo obtained by POLITICO.
IRS employment at the beginning of the year stood at about 100,000. The Politico article says that it will drop to between 60,000 and 70,000.
NBC reports (4/16/2025) on the demise of Direct File, the government-provided electronic preparation service:
The Trump administration plans to eliminate the IRS’ Direct File program, an electronic system for filing tax returns directly to the agency for free, according to two people familiar with the decision.
The program developed during Joe Biden’s presidency was credited by users with making tax filing easy, fast and economical. But Republican lawmakers and commercial tax preparation companies complained it was a waste of taxpayer money because free filing programs already exist, although they are hard to use.
I think that is unfortunate but expected (and not a big deal compared to the other stuff happening). Given the computational and reporting complexity Congress has layered into the tax system,2 using software to prepare returns is the overwhelming practice3 and we want everyone to electronically file, because it the most efficient and secure way to do so. Giving taxpayers a government-provided option for doing that seems not that much different than providing them with paper forms, instructions, and other guidance in the 20th century. It’s just a matter of degree.4
Update: 5/6/2025
A TITGA snapshot report (5/2/2035) is out with more detail on the reduction in IRS employment and presumably information one can trust as reliable. It shows an 11% reduction in IRS headcount, either through layoffs or employees who accepted the fork email (deferred resignation program or DRP to use the technical term). However, the types of employees leaving is quite uneven: 31% of revenue agents, 18% of revenue officers, but only 5% of IT employees.
My editorial observation: the high percentages of revenue agents and officers is alarming. I would not discount the chances of long-term effects on revenue collections. On that topic, the Penn Wharton Budget Model is out with a post that indicates the downsizing has not affect revenues collections so far. As I previously suggested, I did not think the speculation in a WaPo story that collections this filing season would be down materially to be a likely outcome.
The fact that IT employees constitute a disproportionately small share seems contrary to media reports, which I previously blogged about, that the IT modernization of the IRS was being particularly hard hit. This paragraph from the TITGA report (p. 2) probably is a partial explanation for that disconnect:
In March 2025, the IRS reported that it placed 48 senior Information Technology employees on administrative leave. Treasury and IRS leadership determined that “the best way to improve the performance of the IRS was to place approximately 50 personnel, primarily non-technical, who were in technical decision-making roles on temporary paid administrative leave while information technology reform efforts were underway.” Of the 48 employees placed on leave, 27 were either in key management positions or were individuals recruited for their expertise related to the IRS’s restructuring efforts.
In short, the modernization effort was hard hit (to put it mildly), but those employees were a small share of the total IT employees.
The report breaks down departing employees by state. Minnesota had 76. Texas had the most at 1,241.
Of the employees accepting the DRP, 47% were over age 55. A good guess is that a fair number of these were planning to retire or leave in the near future, a testament to how poorly thought out the DRP was by Musk and his minions.
President Trump has replaced the acting commissioner of the Internal Revenue Service after his appointment just days earlier set off a power struggle between Treasury Secretary Scott Bessent and the billionaire Elon Musk, five people with knowledge of the change said Friday.
Mr. Bessent’s deputy, Michael Faulkender, will be the new acting leader, replacing Gary Shapley, the Treasury Department confirmed on Friday. Mr. Faulkender will be the third acting leader of the agency this week.
Mr. Bessent had complained to Mr. Trump this week that Mr. Musk had done an end run around him to get Mr. Shapley installed as the interim head of the I.R.S., even though the tax collection agency reports to Mr. Bessent.
Yikes. FYI, Shapley was the whistleblower in Hunter Biden lap top case.
The revolving door at the top of the agency – mainly caused by career civil servants resigning or being fired over refusals to go along with administration orders or demands – is truly mind boggling. A successful filing season may prove that the agency can run on autopilot for a time, despite multiple departures by rank-and-file employees and an absence of leadership at the top.
A Trump administration appointee asked the IRS in March to review an audit of MyPillow CEO Mike Lindell, a close President Trump ally, according to The Washington Post, which cited two people familiar with the matter and records that the news outlet obtained.”
A Minnesota connection appears in the category of helping your friends.
The IRS directed the Treasury official to contact TIGTA according to the article and Times coverage. The Hill article reports some of the dispute relates to Lindell’s company’s claim of the Employee Retention Credit. I’m sure Billy Long will be able to help Lindell, once he’s confirmed by the Senate, since he was peddling the credit before he was appointed.
“Perhaps Harvard should lose its Tax Exempt Status and be Taxed as a Political Entity if it keeps pushing political, ideological, and terrorist inspired/supporting “Sickness?” [Trump] wrote on Truth Social. “Remember, Tax Exempt Status is totally contingent on acting in the PUBLIC INTEREST!”
This falls into the category of punish your enemies or gain control of (or trash) institutions you don’t like. It has gotten extensive coverage in the media, obviously. It stimulated the NY Times background piece linked above.
This has some faint resemblance to Bob Jones University’s losing its tax-exempt status over its ban on interracial dating in the 1980s.5 But there are massive differences both process and substance. Mike Graetz’s book, the Power to Destroy (Chapter 3) has the details and is worth reading. The dispute was controversial. The IRS in the early ‘70s pulled Bob Jones’ tax exempt status because it refused to admit blacks altogether. The school later reversed that but prohibited interracial dating. The Reagan administration inherited the case and was not happy with litigating it. By that time, it was in the federal appeals court. On appeal (the second time) to SCOTUS, DOJ claimed IRS had erred in pulling the tax exemption and the Court had to appoint a private lawyer (William Coleman) to argue for upholding the denial. This is miles away from pulling Harvard’s exemption because of differences over political or ideological views, amorphous DEI practices, or whatever, at least IMO.
A Tax Notes article, Marie Sapirie, Harvard Has a Precedent Problem in Fight to Keep Exempt Status (5/12/25) [no paywall], goes over many of the same details as Graetz’s account but without the key background he provides related to the growth of segregation academies in the South and other illuminating details.6 An interesting item I picked up from her account was later twice Attorney General Bill Barr’s involvement in the Reagan Administration’s involvement.
President Donald Trump on Thursday ramped up his threats to scrutinize the tax-exempt status of groups and colleges he disagrees with, calling out a prominent organization that’s fighting some of his actions in court. Trump told reporters “we’re looking at” Citizens for Responsibility and Ethics in Washington (CREW), a nonprofit watchdog group that has launched litigation against his executive actions and conducted investigations into what it alleges are his conflicts of interest.
Howard Gleckman at TPC has a good short summary, along with background information, on the potential yanking of Harvard’s tax-exempt status and why it’s a legal reach and bad policy.
Update (5/5/2025): On Friday (5/2), Trump posted on his social media site about it, per this NBC story: “We are going to be taking away Harvard’s Tax Exempt Status. It’s what they deserve!” The article quotes several law professors and other experts (e.g., Ed McCaffery) that his doing so will make legal case for doing so more problematic.
Reactions
Hypocrisy revealed
The Republican Accountability project has a video clip of a variety of Republican elected officials (Cruz, Rubio, etc.) decrying similar (alleged) behavior during the Obama administration, but of a much milder character.
I had siblings who were very concerned about the Obama administration using the IRS to target conservative groups by denying them tax exempt determination letters based on their conservative viewpoints. They felt sufficiently strongly about it to go to Washington to meet with their members of Congress to urge them to do something. Neither of them is a tax professional; their concerns were simply stimulated by the media coverage of the controversy and GOP politicos hyping it.
I had a more benign view of IRS staff (knowing a few personally and working with a few professionally over the years) and a degree of skepticism about the controversy. But there seemed to be too much smoke for there not to be something going on. To inform myself, I spent way too much time reading Congressional and TIGTA reports on those assertions and concluded that they were much ado about little. Yes, there was some bad behavior there (e.g., by Lois Lerner), but it was mild and never clearly linked to or ordered by political appointees. Here, we have top officials (e.g., the president himself) making it clear that what is going on. On a scale of 1 to 10 (with 10 being the worst), what went on in the Obama administration was maybe a 2 or 3 and what we have now is an 8 or 9. Oy.
Prospects
Unfortunately, I don’t think there is much that can be done under the circumstances, other than the targets fighting back and challenging matters administratively or judicially. That will be expensive and distracting for those that can afford it. The general trashing of the agency will take years to rebuild if that is possible.
I can think of only one bright spot. My more fundamental concern about the administration is its undermining of the rule of law and moving the US closer to authoritarian rule, as evidenced by its sparring with the courts in multiple contexts.7 The trashing of the IRS pales in comparison. But true authoritarians seek to use governmental power to control society. That requires robust revenues to fund the effort and seems inconsistent with trashing the government’s ability to collect taxes. Probably wishful thinking on my part, but it was the only ray of light I could conjure up.
Notes
Robert Jackson, who FDR later appointed to SCOTUS and who was a chief Nuremberg war crimes prosecutor, obtained a civil judgement against Mellon for unpaid taxes after the grand jury refused to indict him. Even that itself was a bit of a feat. An account of the details of these cases and how they were tied up with Mellon’s funding of the National Gallery of Art can be found in the history of the first 50 years of NGA (pp. 25-27). ↩︎
One personal data point: I have older relatives who still file on paper and have helped them wade through Schedule D and calculating the tax on long term capital gains and qualified dividends. That alone (without getting into Schedule E or other complexities) should be enough to drive the average Luddite to use software. ↩︎
IRS filing statistics (4/11/2025) show that 96.8% returns filed so far this year were e-filed. Nearly all of those were prepared with software and many of the paper filed returns were also likely prepared with software. Hand-prepared returns are truly a tiny percentage of all individual returns. ↩︎
Another obvious option is a tax credit for purchasing tax prep. I think that is a second-best solution for a variety of reasons that requires a separate more extensive discussion. Less accountable and more expensive for the equivalent service are my main concerns. ↩︎
The SCOTUS precedent in Bob Jones will likely provide the template for an attempt to deny Harvard or other entities their 501(c)(3) status. The standard in the case is very general (an administrative determination of practices not “in harmony with the public interest”) and superficially could be employed widely. To my knowledge it never has been. I would think a Court that is highly skeptical of the administrative state (see Loper Bright) would be reluctant to invest much of that type of discretion to IRS or any other administrative entity, even if it is controlled by their favored partisans. There’s a chance the current Court would not decide Bob Jones the way the Burger Court did. The case should be considered sui generis because of the racial discrimination involved. ↩︎
Graetz’s angle is how this was a scrimmage in the anti-tax movement’s war to take over the Republican Party and US fiscal politics. ↩︎
Reading Jack Goldsmith’s and Bob Bauer’s blog posts (example) does that to me. ↩︎
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