More than 270 million returns were filed with the Internal Revenue Service (IRS) during the fiscal year 2025, and most filers hope no follow-up examination letter arrives.
The threat of that letter has long done more enforcement work than the paperwork examinations themselves in the federal tax system.
Data from the Treasury Inspector General for Tax Administration (TIGTA) suggests that deterrence is thinning fast at the upper end of the American income distribution today.
For those earning under $400,000 with clean W-2 income, the immediate audit risk in the mailbox has not shifted much yet. The long-term question is who ends up funding the federal government once enforcement capacity at the top disappears from Washington.
IRS audit revenue drops 35% after enforcement staffing cuts
TIGTA’s August report pegged fiscal 2025 IRS audit collections at just $6.5 billion. That marked a $3.5 billion drop from fiscal 2024 collections and represented a 35% year-over-year decline in overall enforcement revenue. The gap reflects the loss of experienced examiners across the agency.
Enforcement and collections headcount fell to 17,517 employees by January 2026, down from a peak of 27,217 at the end of fiscal 2024, the report said.
Where the cuts landed matters as much as the raw staffing figure, and the composition falls heavily on high-income and complex returns. Losses of more than 3,600 revenue agents through mid-2025 wiped out roughly 31% of the agency’s entire auditing corps by that point.
Individuals earning above $400,000 saw roughly 43,000 examinations opened in fiscal 2025, a 26% drop from the prior year, based on the TIGTA report.
New business partnership audits fell 30% during the same period, and the IRS Global High Wealth program operated with 27% fewer employees.
Yale Budget Lab projects a $600 billion IRS revenue loss from DOGE-era cuts
The revenue lost from those cuts stretches well beyond the fiscal 2025 shortfall in enforcement collections at the tax agency. A Yale Budget Lab projection pegs the loss from those 2025 staffing reductions alone at roughly $600 billion over 2026 through 2035.
That figure adds to a tax gap already running near $700 billion in unpaid federal taxes each year across the system. The layoffs, plus a $20 billion appropriations clawback, together push projected revenue losses above $861 billion for the decade.
More Taxes:
- $49B in tariff refunds put U.S. deficit on dangerous path
- IRS opens new path to Covid refund claims before deadline
- IRS tax liens are raising new alarms for your finances
The Yale team built the $600 billion projection using activity-specific return-on-investment figures drawn from published federal tax enforcement research.
Every dollar previously spent on IRS enforcement historically returned several dollars in additional collections, so each staffing cut compounds against the Treasury.
The workforce reductions reversed a hiring build funded by earlier legislation aimed at closing the tax gap in a durable way.
Congress had appropriated $79.4 billion to the IRS under the Inflation Reduction Act (IRA), and roughly two-thirds of that money has since been rescinded.
Enforcement pullback leans compliance system on verified W-2 income
The composition of the annual federal tax gap explains why the enforcement retreat lands unevenly across the American filer population today.
Wage income reported on W-2 forms is reported with roughly 99% accuracy, while sole proprietor income, which faces little third-party reporting, is underreported at a rate near 55%, according to the IRS Federal Tax Compliance Research.
Natasha Sarin, Yale Budget Lab president and a former U.S. Treasury tax policy counselor, has argued that thinner enforcement effectively rewards the highest earners.
Her research places roughly one-third of the annual tax gap on the top 1% of American earners, who were subject to the thinnest enforcement staffing by early 2026, according to the U.S. Department of the Treasury.
Sarin told NPR on Sept. 2, 2026, that pulling auditors out of the agency does not save the federal government money.
<strong>Defunding the IRS is not a money-saving proposition because you have fewer employees. It is a money-losing one, because you do a less good job of collecting taxes</strong>.
For salaried filers, the practical consequence is that the compliance system leans more heavily on income streams the IRS can already verify through third-party documents.
Deficit fallout looms as IRS enforcement retreat continues into fiscal 2026
Those with clean W-2 income face no immediate audit spike, since the enforcement retreat has focused on complex returns, the Yale Budget Lab research showed.
The larger fiscal story lands on ordinary taxpayers through federal deficits, and it stretches across the decade to come.
Those projected losses layer onto deficit concerns already raised by Treasury Secretary Scott Bessent, and the fiscal burden ultimately falls on ordinary taxpayers through wider federal shortfalls.
IRS chief executive officer Frank Bisignano told the Senate Finance Committee in April 2026 testimony that the agency’s advanced data and analytic strategies now catch instances of tax evasion that would have been “undetectable just a few years ago.”
The fiscal 2026 enforcement collections figure and any 2027 IRS budget action stand as the earliest measurable indicators of whether the enforcement retreat continues, according to the Yale Budget Lab analysis.
Related: IRS has hidden fix for retirees who missed Sept. 15 deadline
