The April 15 tax filing deadline just passed, the IRS is undergoing a major transformation with sweeping implications for American taxpayers and the federal budget.

In a media briefing on April 11, hosted by American Community Media, a panel of experts discussed the changes headed to the way taxes are changing in the United States. 

Speakers

  • Michael Kaercher, Deputy Director, NYU Tax Law Center; Former IRS Attorney
  • Natasha Sarin, Professor of Law and Finance, Yale University. President, The Budget Lab
  • Richard Prisinzano, Director of Policy Analysis, The Budget Lab
  • Aravind Boddupalli, Senior Research Associate, Urban-Brookings Tax Policy Center

Under the direction of the Elon Musk-led Department of Government Efficiency (DOGE), the agency is set to reduce its workforce by 18% to 25% by late May — eliminating thousands of jobs in a move projected to cost the government $395 billion in lost revenue over the next decade.

Meanwhile, the Republican-controlled House passed a budget resolution in late February that would slash taxes by $4.5 trillion through 2034, offsetting part of the cost with nearly $2 trillion in spending cuts. Analysts warn that doubling down on Trump-era tax cuts would add $3.6 trillion to the national debt over the next 10 years, with the wealthiest 5% of Americans receiving half of the benefits.

The IRS plays a central role in funding the federal government, collecting 96% of total revenue — $4.7 trillion — in fiscal year 2023. In 2024, it is projected to collect 97%, or roughly $5 trillion. However, about 14% of taxes owed — around $700 billion — will go unpaid.

The majority of that unpaid tax burden comes from high earners with income not subject to automatic wage withholding, said Natasha Sarin.

“there’s a lot of scope to manipulate and pay less than their true tax liability … and the vast plurality of this comes from the highest earners,” Sarin said. Of the $700 billion tax gap, $200 billion — or nearly 30% — is estimated to come from the top 1% of earners.

The IRS’ ability to audit wealthy taxpayers has historically been one of its weakest points, Sarin noted, because investigating complex returns requires highly trained agents to manually sift through thousands of pages of corporate tax filings — a workforce the agency has been slashing.

Earlier this year, about 7,000 probationary IRS employees were let go. Though the agency has since offered them the opportunity to return by April 14, the erosion of expertise is likely to have lasting consequences.

Each additional hour spent auditing high-net-worth individuals (those earning $5 million or more annually) yields $4,500 in otherwise uncollected taxes, according to prior IRS estimates.

“As you do less enforcement, you lose not just direct dollars, but also these indirect or deterrent dollars,” Sarin said, adding that total revenue losses over the next decade could range from $400 billion to $2.4 trillion.

For most Americans, the cost of tax compliance is already substantial. Each year, individuals collectively spend about 7.1 billion hours and $148 billion in out-of-pocket costs preparing their taxes, with the total economic burden — including lost productivity — reaching $316 billion.

For workers whose income is automatically reported, voluntary tax compliance remains high. “But if you have no reporting like that, you may drop to worse than 50%,” said Michael Kaerche.

The House budget resolution also proposes using a “current policy baseline,” assuming Trump-era tax cuts are permanent — a move Kaercher described as “pure marketing” and “unprecedented,” allowing lawmakers to obscure more than $3 trillion in the true cost of extending the cuts.

Of the nearly $2 trillion in spending cuts proposed to offset the tax reductions, about $880 billion would come from Medicaid. Additional significant cuts are targeted at the Supplemental Nutrition Assistance Program (SNAP).

“These incredibly generous tax cuts that heavily tilt towards the rich are coming right out of the pockets of the lowest-income people, including undocumented immigrants,” Kaercher said.

In 2023, undocumented immigrants paid an estimated $66 billion in federal income and payroll taxes, two-thirds of it through payroll taxes, according to the Yale Budget Lab.

However, recent IRS actions could disrupt this flow. On April 8, the agency signed an agreement with Immigration and Customs Enforcement (ICE) granting ICE access to private taxpayer information — including home addresses, taxpayer numbers, and financial records — for deportation purposes.

This controversial move prompted the departure of Melanie Krause, the IRS’ acting commissioner, marking the agency’s third leadership change this year.

Richard Prisinzano said the IRS-ICE agreement is likely to discourage undocumented taxpayers from filing returns, leading many to overpay taxes to avoid government scrutiny, or to move to under-the-table work arrangements without withholding.

The Budget Lab estimates that the policy could cause a 0.5% loss in federal income and payroll tax revenue on average, costing between $12 billion and $39 billion in 2026 alone — and up to $479 billion over the next decade.

“It seems to me that this is another avenue to push immigrants, and most taxpaying Americans, into the shadows,” said Aravind Boddypalli.

Boddypalli warned that when immigrants lose access to formal banking, credit, and government benefits like the Earned Income Tax Credit and Child Tax Credit, “the entire economy shrinks.”

“When you don’t have a valid taxpayer number, it doesn’t just affect employment but credit access to buy a home, start a business, even to open a bank account,” he said. “We’re all collectively worse off for it.”