A Smaller IRS, a Different Kind of Enforcement
The IRS is meaningfully different than it was eighteen months ago. The agency has lost more than a fifth of its workforce since the start of 2025, its budget has been cut, and most of the funding boost it received from the 2022 Inflation Reduction Act has been clawed back.
What this adds up to isn’t just a smaller IRS. It’s a different IRS.
The agency is reshaping what it enforces, how it enforces it, and which taxpayers are most likely to hear from it. That story is worth understanding, both because it’s genuinely consequential and because the practical implications for taxpayers aren’t what you might first assume.
The numbers behind the change
Congress set the IRS’s fiscal year 2026 budget at $11.2 billion, about 9% below FY25. House appropriators are pushing for a further cut to $10.2 billion in FY27. The agency has lost more than 20% of its workforce since January 2025 through deferred resignations and layoffs, with additional departures expected this year.
The Trump administration’s FY27 budget request includes an 18% reduction in enforcement activity and projects an enforcement workforce below 25,000. Within that already shrunken enforcement arm, some of the largest losses have hit the examination and collection groups, and many of those who left were experienced agents and managers carrying years of institutional knowledge that won’t be easy to replace.
In plain English, the IRS has fewer people, fewer experienced reviewers, and less capacity to conduct traditional enforcement the way it once did.
Fewer audits, especially at the top
The audit rate for individuals has been well below 1% for several years, and we expect it to keep falling, at least over the next few years.
Audits of individuals with $10 million or more of income, which numbered 6,786 in FY25, dropped to 2,264 in FY26. Partnership audits fell from 3,174 to 2,932 over the same period. The agency forecasts further declines in both categories in FY27.
For clients in higher income brackets, who historically faced disproportionate audit attention, the near-term picture is meaningfully different than it was even two years ago. The headline probability of a traditional audit appears lower.
But that doesn’t mean enforcement risk has disappeared. It means the nature of that risk is changing.
The odds of a traditional audit may be lower, but the audits that remain are less likely to be random noise. They’re more likely to be tied to something specific in the return, such as a mismatch, an anomaly, a complex transaction, or an item that doesn’t reconcile cleanly with third-party data.
What’s replacing the lost capacity
That’s the headline. The more interesting story is what’s replacing the lost capacity.
IRS leadership has said publicly that fewer audits will be paired with more targeted ones, and the mechanism for that targeting is increasingly data analytics and artificial intelligence. The agency has been investing in software that mines taxpayer data to surface anomalies, flag suspicious activity, and identify cases for review.
Even with reduced funding, the direction of travel is clear: the IRS is leaning harder on technology because it no longer has the same human capacity. The intent is to compensate for the loss of human reviewers by being more precise about who gets reviewed in the first place.
We’ll see how well it works in practice. But the direction is clear: less of the broad coverage that audit rates traditionally measured, and more of the targeted attention those same rates fail to capture.
Where enforcement is concentrating
Two areas in particular look like they’ll absorb a disproportionate share of the enforcement capacity that remains.
The first is refundable credits, where the IRS estimated improper payments of $21.4 billion in FY24 alone. The earned income credit, the American Opportunity credit, and the premium tax credit are all on this list, and all are well-suited to algorithmic review.
For many higher-income households, refundable credit reviews may not be the primary concern. But they illustrate the broader enforcement shift. The IRS is favoring areas where software can flag returns quickly and where discrepancies can be identified without a large team of experienced agents.
For you, the more relevant version of that same shift is income matching.
The IRS’s automated underreporting program compares the W-2s, 1099s, and other third-party tax forms it receives against what taxpayers report on their returns. Significant mismatches generate a CP2000 notice, which is computer-driven and doesn’t require an experienced agent to produce.
This matters for households with brokerage accounts, equity compensation, retirement income, business income, K-1s, real estate activity, charitable giving, or multiple sources of income. The more moving pieces there are, the more important it becomes that the return tells a clean and consistent story.
Traditional enforcement may shrink, but automated enforcement can still expand because it requires fewer experienced agents to initiate. As enforcement leans further into automation, expect more of this kind of correspondence, not less.
What it means for you
For you, this all means a few things.
First, the headline audit risk for high-income clients is genuinely lower than it was. That’s a real shift, and it’s worth naming rather than dismissing. But it isn’t a license for casual recordkeeping.
The audits that do occur will be more precisely chosen. That means the cases that get pulled are more likely to be cases where something genuinely doesn’t reconcile. Clean books, good documentation, and coordinated reporting matter at least as much in this environment as they did before, possibly more.
Second, the surface area for automated correspondence is growing.
CP2000 notices, refundable credit reviews, and other algorithm-driven inquiries don’t feel like audits and may not show up in the headline audit statistics. They may not require the same scope of work as a full audit, but they still require careful review, documentation, and a timely response.
If you receive one, the worst thing to do is ignore it. The deadlines on these notices are real, and the IRS’s response to silence is rarely favorable.
Third, the shape of the agency is going to keep changing.
Budget proposals are still being debated, workforce attrition is ongoing, and the technology is still maturing. What looks like a settled picture today may shift again over the next year or two.
That’s part of why we follow this closely. Tax planning is most useful when it accounts for where the enforcement environment is going, not just where it is.
Why coordination matters more now
This is also why tax planning and wealth planning shouldn’t live in separate silos.
The more complex your income, investments, retirement withdrawals, equity compensation, business interests, or estate planning becomes, the more important it is that the tax return tells the same story as the financial plan.
A smaller IRS may conduct fewer traditional audits. But a more automated IRS may still notice when the pieces don’t line up.
That’s why tax planning isn’t just about finding deductions or reacting before year-end. It’s about making sure decisions are coordinated before they show up on a return. Investment decisions, retirement income decisions, Roth conversion decisions, charitable giving decisions, and estate planning decisions can all create tax consequences. The goal is to understand those consequences ahead of time rather than explain them after the fact.
The Big Takeaway
None of this changes the fundamentals of what we do for clients.
We aim to file accurately, document thoroughly, and structure things so that when the IRS does ask a question, the answer is already on the shelf.
That discipline mattered when audit rates were higher, and it matters now, even as the agency asking the questions becomes smaller, more automated, and more selective.
The goal hasn’t changed: clarity in your filings, confidence in your position, and the peace of mind that comes from knowing the work was done right the first time.