Four DOGE Reforms to Make the IRS Great Again

By

ROBERT A. WARREN

TIMOTHY J. FOGARTY

VILSON DUSHI

President Trump has made slashing federal spending a cornerstone of his fiscal policy,¹ presumably to tackle the projected $1.9 trillion budget deficit for fiscal 2025, which follows the $1.9 trillion budget deficit for fiscal 2024.² To that end, he has enlisted billionaire Elon Musk to form a new government agency, initially named the Department of Government Efficiency (DOGE), to identify possible efficiencies and budgetary reductions. Upon taking office, Trump established the United States DOGE Services to formalize this mission.³ Musk has invited members of the public to submit their suggestions, and we have taken him up on his gesture of inclusion, as has Sen. Elizabeth Warren, D-Mass. (no relation to the lead author).⁴ In this article, we will suggest four changes to either the tax laws or IRS operations that would cut costs, raise revenue, make the IRS more efficient, or a combination of those.

Suggestion 1: Sunset the Earned Income Tax Credit

The earned income tax credit, first enacted in the 1970s, is a refundable tax credit designed to offset the effect of payroll taxes on low- and moderate-income workers as well as to provide an incentive to work.⁵ The eligibility requirements to claim the EITC are based on several factors that include marital status, adjusted gross income (which must include earned income and comes with a limit on passive income), and the existence and number of qualifying children (the claimant receives a benefit for up to three children). The maximum credit for tax year 2024 is $7,830.⁶ A complete list of criteria may be found in IRS Publication 596 of 2024.⁷

The EITC is popular with conservatives because it is meant to reward hard work; it is popular with liberals because it constitutes a direct cash payment to the working poor. From fiscal 2014 through 2023, EITC recipients received $788.1 billion from the credit in 2023-adjusted dollars (Table 1). However, this program is permeated with fraud. As shown in Table 1, of the $788.1 billion in inflation-adjusted EITC payments from fiscal 2014 through 2023, $207.55 billion (26.3 percent) is estimated by the Treasury Inspector General for Tax Administration as being improper (potentially fraudulent). By eliminating the EITC, the government could save $788.1 billion over the next 10 years, as well as stop another $207.55 billion in improper payments.

In addition to reducing the budget deficit, eliminating the EITC would save both the public and the IRS the substantial effort of filing, processing, and auditing the returns. As shown in Table 2, from tax years 2012 through 2021 (the most recent year for which reliable data is available from the IRS), the public filed 1.53 billion individual tax returns, 279.1 million of which claimed the EITC — almost 18.2 percent of all returns filed during that period. By eliminating the EITC, DOGE may substantially reduce the number of returns filed by the public because many of these taxpayers would have no need to file a return if their income was below the threshold for filing.

Table 2 also reports the audit results of the EITCs selected for examination. Of the 279.1 million EITC returns filed from tax years 2012 through 2021, 3.1 million (1.1 percent) were examined. Of those 3.1 million EITC returns, 2.8 million were changed based on the audit, which means 88.3 percent of the returns selected for examination were adjusted. Those adjustments resulted in an additional tax due and owing of $14.5 billion. The amount potentially recouped by audits is minuscule compared with the estimated fraud in the program (Table 1).⁸

Our wish is not to weigh in on how best to offer incentives to the working poor. The experiment with this part of the social safety net configured as part of the income tax interface between the government and the people has created some undesirable consequences. In addition to being a lightning rod for fraud, we believe the EITC has consumed excessive IRS resources that would have been better directed at collecting the income tax owed by wealthier taxpayers.

Suggestion 2: Factor IRS Taxes Receivable

The IRS has a revenue collection problem. According to the past 10 audit reports issued by the Government Accountability Office — aggregated in Table 3 — the IRS has written off a staggering $1 trillion in uncollected taxes and estimates that it will collect only $139.2 billion of the $389.9 billion owed to it — a measly collection rate of only 35.7 percent. In other words, the IRS expects to collect only 35.7 cents on the dollar for its receivables.

The IRS’s inability to collect taxes owed is not surprising to anyone who follows the agency’s personnel trends. As shown in Table 4, the number of revenue officers employed by the IRS has dropped by 1,741 from fiscal 2014 to 2023, a decrease of 39.2 percent. The decline is even steeper when compared with fiscal 2010, when the IRS employed 6,042 revenue officers.⁹ Here the decrease in the number of revenue officers is 3,344, which represents a 55.3 percent drop in the number of IRS employees responsible for collecting the taxes that fund our government.

Faced with the reality that the IRS lacks enough personnel to collect the hundreds of billions of dollars in taxes owed, we recommend that the IRS factor (sell) its taxes receivable to the public. Assuming the IRS could factor the receivables for more than 35.7 cents on the dollar, the Treasury Department would come out ahead of its collection projection. The political headwinds that seem to accompany increases to the number of people employed by the IRS suggest that selling the receivables may be a more palatable alternative to the electorate. This option, however, is not without difficulty. To sell tax receivables would require substantial revisions to the IRS disclosure laws as codified in section 6103, as well as the implementation of a mechanism for selling these receivables.¹⁰ Another hurdle is the approach that would treat unpaid taxes as if they were just another debt for which the normal collection methods should apply.

Suggestion 3: Stop Paying Special Agents for Hours Not Worked

Most federal special agents are eligible for law enforcement availability pay (LEAP).¹¹ The LEAP rules governing IRS Criminal Investigation division special agents are in Internal Revenue Manual 9.11.4.8. In summary, special agents are paid based on a 50-hour work week, recognizing that crime does not clock out at 5 p.m., so catching criminals requires special agents to work long hours and keep an irregular schedule to accommodate events such as midnight trash runs, early morning search warrants, and weekend trial preparation. Special agents, however, do not have to work 50 hours each week to receive the LEAP pay, which equals 25 percent of their base salary, or two hours per day.

That necessary compensatory supplement contains another possibility that tips it into the abusive. A special agent can claim an “exclusion” day¹² that allows them to be compensated for the extra two hours of pay on days they did not perform any work.¹³ To illustrate: A special agent takes eight hours of annual (personal) leave to go fishing. That special agent will receive pay for 10 hours on the day he goes fishing (eight hours of personal leave and two hours of LEAP pay). However, the special agent will not be required to work his LEAP hours for that day. Thus, he has taken eight hours of leave and received 10 hours of pay. To put the issue on a larger scale, all IRS special agents receive 10 hours of pay for each federal holiday (eight hours of holiday leave and two hours of LEAP pay). However, they will not have to work the extra two hours for which they were paid.

How big of an issue is this for the IRS? As shown in Table 5, from fiscal 2012 through 2023, IRS special agents claimed about 1.67 million exclusion days, meaning that they were paid for around 3.34 million hours in which they did not work. If divided by a normal work year of 2,080 hours, one may conclude that taxpayers paid for 1,605 special agent work years for which they received no benefit.

Suggestion 4: Exempt the IRS From the Hiring Freeze

Trump issued a memorandum on his first day in office freezing most federal hiring for 90 days, and he extended the hiring freeze indefinitely for the IRS.¹⁴ Exempted from the freeze are “military personnel of the armed forces or . . . positions related to immigration enforcement, national security, or public safety.”¹⁵ The memo goes on to state, “Moreover, nothing in this memorandum shall adversely impact the provision of Social Security, Medicare, or Veterans’ benefits.”¹⁶ By freezing IRS hiring, the Trump administration is doing exactly what the memo is intended not to do because all those agencies rely on the IRS to fund their operations. Our war fighters, veterans, and immigration agents will not be compensated if the IRS does not collect the taxes necessary to fund these commitments. As it says in scripture, “A worker is worth his wage.” However, the worker will not get paid if the employer does not have the cash to pay him.

The hiring freeze also impedes the IRS’s ability to close the tax gap, which is critical to Trump’s promise to eliminate the projected $1.9 trillion fiscal 2025 budget deficit.¹⁷ The tax gap is the amount of tax dollars the IRS fails to collect annually.¹⁸ The IRS today estimates this figure at $606 billion after enforcement efforts,¹⁹ which primarily includes only legal-source income and not income earned from illegal activities such as narcotics trafficking.²⁰ The Congressional Budget Office estimated in 2020 that a $40 billion investment in IRS enforcement over 10 years would yield an additional $104 billion in tax revenue — a return of 260 percent.²¹

Magnifying IRS enforcement efforts would be a good investment for the American taxpayer. Unfortunately, budget cuts begun by Republicans during the Obama administration have decimated the ranks of enforcement personnel. As shown in Table 6, only the numbers of tax examiners (employees that audit low-level returns) have not suffered double-digit declines, with revenue officers (the employees who collect back taxes) suffering an almost 40 percent reduction in force.

Some might argue that the infusion of almost $80 billion from the Inflation Reduction Act will solve this problem, but they would be mistaken for several reasons. First, Republicans recently froze more than $20 billion of the IRA funds, so the amount of IRA funding that will be available to the IRS is unknown.²² Second, employees seem to be leaving the IRS almost as fast new ones are hired. As noted in Table 7, during fiscal 2022 and 2023, the IRS onboarded 30,915 external hires, but an estimated 21,562 employees left the IRS, most likely reflecting retirements. That resulted in a net increase of only 9,353 employees. If the IRS is going to close the tax gap, it needs much larger increments of resources.

Conclusion

The IRS is a large and complex part of the government without any parallel in its purpose. We have detailed two well-intentioned provisions that have led to a waste of resources. One pertains to the questionable use of the agency to implement an income redistribution program; the other involves the complexity of compensation when the IRS is drafted into combating crime. However, more importantly, the government needs to recognize what the IRS can and cannot do, and it has proven itself to be a poorly motivated collection agency.

When the IRS is tasked with answering every problem, it is less than inefficient. However, when left to be what it was originally designed to be, it can do very well. An IRS fully staffed with highly trained, equipped, and motivated tax enforcers is vital to the fiscal health of the United States government. Compliant taxpayers deserve to enjoy a reasonable belief that their neighbors are not freeloading on government services without carrying their legislated tax burden. Our four suggestions, most of which require legislative assistance from Congress, would enable the IRS to better serve American taxpayers.