Tax revenue could drop by 10 percent amid turmoil at IRS

Senior tax officials are bracing for a sharp drop in revenue collected this spring, as an increasing number of individuals and businesses spurn filing their taxes or attempt to skip paying balances owed to the Internal Revenue Service, according to three people with knowledge of tax projections.

Treasury Department and IRS officials are predicting a decrease of more than 10 percent in tax receipts by the April 15 deadline compared with 2024, said the people, who spoke on the condition of anonymity to share nonpublic data. That would amount to more than $500 billion in lost federal revenue; the IRS collected $5.1 trillion last year. For context, the U.S. government spent $825 billion on the Defense Department in fiscal 2024.

“The idea of doing that in one year, it’s hard to grapple with how meaningful of a shift that represents,” said Natasha Sarin, president of the Yale Budget Lab and a senior Biden administration tax official.

The reason, officials say, is directly tied to changing taxpayer behavior and President Donald Trump’s rapid demolition of parts of the IRS. Senior tax agency officials issued detailed warnings about those outcomes to the incoming Trump administration before the president took office, according to records obtained by the Washington Post.

The administration has moved to fire nearly 20,000 agency employees, specifically targeting new hires in taxpayer services and enforcement divisions. It’s already dismissed more than 11,000 workers at the agency, though some of their statuses are unclear pending fast-moving court cases.

The IRS has dropped investigations of high-value corporations and taxpayers, according to several agency employees involved in those inquiries, because it’s had to triage resources to keep internal systems operating. Two agency commissioners have resigned since Trump took office. The IRS’s head of compliance, Heather Maloy, stepped down effective Friday.

The IRS publishes weekly filing season reports that show the number of returns received and how officials are processing refunds. Those reports show the IRS has received 1.7 percent fewer returns this year compared with the same point in the 2024 filing season.

That percentage is narrower than the projected decrease in total receipts. But the agency also makes more detailed, nonpublic revenue projections based on IRS measurements of scheduled payments from already filed returns and outstanding balances relative to similarly situated taxpayers in previous years.

Those calculations take into account the number of filers who have paid their balances or are owed refunds, those who have scheduled payments by the April 15 deadline, those who have taken extensions, and measurements of annual noncompliance. That gives the agency deeper insight on the amount filers are paying.

The IRS also has separate measurements of business tax receipts. Corporations must pay first-quarter estimated tax on April 15.

“The thing that I think is really alarming is if this data ends up telling a story about how this filing season is evolving, and you’re seeing it happen in real time,” Sarin said.

The IRS has noticed an uptick in online chatter from individuals declaring their intention to not pay taxes this year or to aggressively claim credits and deductions for which they are ineligible, three of the people said — wagering that auditors will not examine their accounts.

Representatives from the IRS and Treasury Department did not respond to requests for comment.

Other dynamics could explain some of the projected drop in revenue, experts say. Natural disasters, such as the Los Angeles-area wildfires, could lead taxpayers in wealthy areas to postpone filing until October, said Timur Taluy, CEO of tax-prep service FileYourTaxes.com. And during times of economic turbulence, some taxpayers typically opt for a penalty-free six-month filing extension.

But neither would entirely account for such a large drop in revenue, experts say, especially after the 2.8 percent growth the U.S. economy experienced in 2024. Tax officials entered filing season expecting to collect more revenue that last year, the people said, because of economic growth and the lack of significant tax law changes.

“There’s no reason to anticipate this based on the economic year we had in 2024,” said Dorothy A. Brown, who studies tax policy and racial disparities at the Georgetown University Law Center.

The results could mean the government has to borrow more money to cover the cost of federal services. The IRS collects 95 percent of federal revenue each year. A shortfall in tax dollars, if Congress doesn’t cut spending to match, would drive up the national debt, which already sits at $36.2 trillion.

IRS officials have weathered well-documented showdowns with Elon Musk’s U.S. DOGE Service and immigration officials over access to highly sensitive personal and business financial data.

But tax filing season has generally proceeded smoothly this year, Taluy said, though IRS data is beginning to show weak spots in agency operations. Roughly 85 percent of callers to IRS helplines are reaching a representative, compared with 93.6 percent at this point in 2024, according to records obtained by The Post.

Senior IRS officials attempted to warn the Trump transition team about the effects of planned staffing and budget cuts at the agency, according to other records, obtained by the Post through the Freedom of Information Act. On top of the DOGE-driven workforce reductions, congressional Republicans also repealed $20.2 billion in resources for the agency as part of a recent government funding law.

“Aggressive reductions to budget and personnel capacity risk backlogs, delays, reduced receipts, and diminished capacity to build next generation digital capabilities,” according to a January presentation given by tax officials to the incoming Trump administration’s Treasury Department team.

The presentation — a 68-slide deck — included recommendations for how the Trump administration could gradually decrease IRS staff numbers without disrupting tax administration. It called for digitizing tax-filing processes and automating the work of some employees in the customer service and compliance divisions.

“The IRS is pursuing a vision of digitalization and automation which will increase the speed and quality of its processes while reducing the overall IRS footprint,” the presentation states. “In the past we have increased our staffing levels to improve taxpayer assistance, tax assessments, and collection processes. However, once modernized, our staffing footprint can be reduced while maintaining performance.”

But the presentation also compares current IRS operations to an “assembly line,” noting that much of the agency’s productivity is dictated by its staffing levels.

“We tried to make clear this is a logistics operation. There’s a science to it. If you put 30 people on the line, this is how much you can accomplish today. If you put 15 people on the line, you can accomplish half of that,” said one person involved in the meeting, who spoke on the condition of anonymity because they weren’t authorized to discuss it publicly. “You can change the productivity over time with a smaller input of personnel, but not this filing season. This is where we are today.”

Shannon Najmabadi contributed to this report.