The IRS Cut Staff to Save Money. It May Have Cost the Government More Instead

Keypoints:

• A Treasury Inspector General report found audit-related tax revenue fell 35% in fiscal 2025
• More than 25,000 IRS employees were laid off or took early retirement in 2025
• Audit revenue dropped from $10 billion in 2024 to $6.5 billion in 2025
• Partnership audits fell 76% between 2023 and 2025
• The IRS estimates $696 billion in taxes goes unpaid every year, mostly from underreported income

A new report from the Treasury Department's Inspector General for Tax Administration found that as the IRS slashed its auditing workforce last year, the amount of unpaid tax it actually collected fell sharply right alongside it. Revenue from audits dropped 35% in fiscal 2025, a decline that coincided with a 27% cut to the agency's enforcement and collection staff.

The numbers behind the drop are specific and steep. More than 25,000 IRS employees were laid off or took early retirement in 2025, including roughly 3,600 tax examiners, and audit-related revenue fell from $10 billion in fiscal 2024 to $6.5 billion in 2025. 

Partnership audits, which the IRS had ramped up during the Biden administration specifically to catch high earners underreporting income through complex business structures, fell 76% between 2023 and 2025 alone.

The core argument in the report is that this wasn't really a cost-saving move at all. "Defunding the IRS is not a money-saving proposition because you have fewer employees," said Natasha Sarin, a former Treasury counselor now teaching at Yale Law School. "It is a money-losing one, because you do a less good job of collecting taxes." 

Sarin pointed out the burden of the roughly $696 billion the IRS estimates goes unpaid every year falls disproportionately on the wealthiest filers, noting the top 1% of earners are responsible for something like a third of that total gap. 

The Inspector General's report went further still, warning the true cost is likely even larger than the numbers show, since audits work partly by deterrence, taxpayers who know enforcement exists are more likely to report honestly in the first place, a chilling effect that doesn't show up in any single year's audit revenue figure. IRS staffing has continued declining into the current fiscal year, and the Trump administration has called for further agency cuts in 2027.