April 3, 2025

IRS Targets High-Income Tax Evaders Amid Budget Cuts and Layoffs

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IRS goes after high net worth individuals

The Internal Revenue Service (IRS) has initiated a significant effort to address tax evasion among high-income individuals. In February 2024, the agency announced plans to target 125,000 taxpayers who earned over $400,000 annually but failed to file tax returns since 2017, aiming to recover up to $100 billion in unpaid taxes.

irs.gov

Challenges Faced by the IRS

Despite this initiative, the IRS confronts substantial obstacles due to budget cuts and resource limitations:

  • Underfunding and Staffing Shortages: Over the past decade, the IRS has experienced significant budget reductions, leading to a 10% decrease in its workforce. This underfunding hampers the agency’s ability to conduct thorough audits and enforce tax laws effectively. cbpp.org
  • Disparity in Audits: A ProPublica report highlighted that individuals earning $20,000 annually are more likely to be audited than those earning $400,000 annually. This discrepancy is partly due to the focus on Earned Income Tax Credit (EITC) audits, which target low-income individuals.

Impact of Recent Layoffs

In early 2025, the situation worsened as the IRS laid off approximately 7,000 employees, primarily in enforcement roles, due to federal budget cuts under the Department of Government Efficiency (DOGE) initiative. These layoffs are expected to:

  • Delay Tax Refunds: With reduced staff, taxpayers may experience significant delays in processing tax returns and receiving refunds. businessinsider.com
  • Weaken Tax Enforcement: The reduction in enforcement personnel limits the IRS’s capacity to pursue high-income tax evaders, potentially leading to increased tax evasion and a broader tax gap. apnews.com

Strategic Delays and Statute of Limitations

The IRS has been compiling a list of non-filers since 2017, aiming to act within the six-year statute of limitations for tax fraud. This strategy seeks to maximize the recovery of back taxes and deter tax evaders from exploiting new loopholes.

Inflation Reduction Act Funding

Temporary funding from the Inflation Reduction Act previously enabled the IRS to enhance tax compliance efforts, including targeting high-income non-filers. However, recent budget cuts have undermined these advancements, raising concerns about the agency’s ability to enforce tax laws effectively.

irs.gov

Focus on Small Business Owners

The IRS’s current initiatives also target 1099 private contractors and small business owners, who may have substantial revenues but modest taxable incomes after expenses. This focus has raised concerns about the agency scrutinizing small business owners struggling with financial management rather than sophisticated tax dodgers.

Broader Implications and Future Outlook

While the IRS’s efforts to audit high-income earners aim to recover significant revenue, the estimated $100 billion is a small fraction of the projected $7 trillion tax gap by 2029. Ongoing underfunding and resource constraints continue to hinder the IRS’s ability to enforce tax laws effectively and ensure fairness in the tax system.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.

Author

  • D. Sunderland

    We created How Money Works to show what is really happening in the world of finance. As someone that has worked in both private equity and venture capital, I have a unique perspective on the financial world

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