The rain drummed steadily against the windows of the cramped IRS field office in Honolulu as I watched Leilani Kama, a veteran revenue agent with 24 years of experience, rifle through a towering stack of case files on her desk. Each manila folder represented a potential tax compliance issue that might never be investigated. “Five years ago, I would have had three colleagues helping me with these,” she explained, gesturing to the intimidating pile. “Today, it’s just me, and I’m already months behind.”
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Kama’s experience isn’t unique—it’s emblematic of a broader crisis affecting the Internal Revenue Service nationwide. While politicians score easy points by demonizing the IRS and slashing its budget, the real-world consequences of these cuts extend far beyond longer hold times during tax season. They create a troubling paradox: cutting the IRS budget doesn’t save money—it loses billions for American taxpayers.
During my three-week investigation into the impacts of IRS budget reductions in Hawaii and across the mainland, I spoke with current and former IRS employees, tax policy experts, small business owners, and ordinary taxpayers. The picture that emerged reveals how seemingly populist anti-IRS rhetoric has created a system that increasingly favors the wealthy and well-connected while shifting more of the tax burden to compliant middle-class taxpayers.
The Mathematics of Short-Sighted Savings
The fundamental flaw in cutting IRS enforcement budgets lies in basic accounting—the agency’s enforcement activities aren’t a cost center but a revenue generator. For every dollar invested in tax enforcement, the IRS collects far more in tax revenue that would otherwise go unpaid.
“It’s like a business firing its entire sales team to cut costs and then wondering why revenue plummeted,” explained Dr. Michael Chen, economics professor at the University of Hawaii. “The math simply doesn’t work.”
The numbers back up this assessment. According to Treasury Department analysis, each additional dollar dedicated to IRS enforcement generates between $5 and $9 in previously uncollected tax revenue. For certain enforcement activities targeting high-income individuals and corporations, the return can exceed $20 for every dollar spent.
The Congressional Budget Office, hardly a partisan entity, has consistently identified increased IRS funding as one of the few government expenditures that actually reduces the federal deficit. Their analysis suggests that adding $80 billion to the IRS budget over a decade would decrease the deficit by approximately $400 billion through improved collections of taxes already legally owed.
A History of Deliberate Decline
The current state of the IRS didn’t happen overnight. Since 2010, the agency has endured significant budget reductions in real terms, with funding falling approximately 20% when adjusted for inflation. During the same period, the agency lost roughly 33,000 employees—more than a third of its workforce.
This decline accelerated following a series of congressional hearings in 2013 that focused on allegations of political targeting. While subsequent investigations found systemic problems rather than political motivation, the narrative of an overreaching IRS had already taken hold in political discourse.
“The IRS became an easy punching bag,” noted former IRS Commissioner John Koskinen during our phone interview. “Politicians found they could score points by calling for cuts to an agency that few people naturally sympathize with, regardless of the practical consequences.”
The impacts of these cuts have been profound and multifaceted. Audit rates have plummeted, particularly for high-income individuals and large corporations. In 2010, the IRS audited 8.4% of returns from those earning over $1 million; by 2023, that rate had fallen below 2.5%. Corporate audit rates have seen an even steeper decline.
Meanwhile, the “tax gap”—the difference between taxes legally owed and taxes actually collected—has grown to an estimated $600 billion annually, according to Treasury Department analysis. That’s enough money to fund the entire annual budgets of the Departments of Education, Transportation, and Veterans Affairs combined.
Who Really Pays When Enforcement Falters
The declining enforcement capacity doesn’t affect all taxpayers equally. For ordinary wage earners, taxes are typically withheld automatically from paychecks, and income is reported directly to the IRS through W-2 forms, leaving little opportunity for evasion even if one were inclined to try.
“If you’re a teacher or a firefighter, your taxes are essentially paid before you even see your money,” explained Honolulu-based CPA Maria Wong. “But if you’re wealthy, with multiple income streams, business entities, and investment structures, the opportunities for creative accounting multiply—and the likelihood of being caught has decreased dramatically.”
This disparity has created what tax experts call a “compliance gap” between different types of taxpayers. The IRS estimates that wage earners report and pay 99% of their income taxes correctly. In contrast, taxpayers with business income that isn’t subject to automatic withholding or third-party reporting have estimated compliance rates as low as 45%.
The impact isn’t just theoretical. During my investigation, I reviewed internal IRS data obtained through Freedom of Information Act requests showing that audit rates for earned income tax credit (EITC) recipients—typically lower-income working families—have declined much less dramatically than audit rates for the wealthy. In fact, EITC recipients are now more likely to face an audit than someone earning between $200,000 and $1 million.
The Human Cost Behind the Numbers
Beyond the abstract billions, there are real human costs to IRS underfunding—for both taxpayers and IRS employees.
At the understaffed Honolulu Taxpayer Assistance Center, I observed dozens of frustrated residents waiting hours for help with basic tax questions. Many had taken time off work, arranged childcare, or traveled significant distances from other islands to resolve issues that could have been handled quickly with adequate staffing.
“I’ve been waiting three hours just to get documentation I need for a mortgage application,” said Daniel Akaka, a construction worker from Hilo who had flown to Oahu specifically for his appointment. “This is my second day of missed work. I can’t afford this, but I don’t have a choice.”
For IRS employees, the situation has become increasingly demoralizing. Career civil servants like Leilani Kama find themselves unable to fulfill the agency’s basic mission despite working mandatory overtime and facing growing case backlogs.
“We’re set up to fail,” Kama told me, her voice reflecting both frustration and resignation. “I joined because I believe everyone should pay their fair share—not a penny more, not a penny less. Now I watch sophisticated tax avoidance schemes go uninvestigated because we simply don’t have the resources to pursue them.”
The technical nature of modern tax enforcement compounds the problem. As businesses and wealthy individuals employ increasingly sophisticated strategies, the IRS has struggled to retain the specialized expertise needed to address complex cases.
“When we do identify potentially significant non-compliance, we often lack the personnel with the right technical background to pursue it effectively,” explained Thomas Washington, a recently retired IRS supervisor who spent 30 years with the agency. “In some specialized areas, we’re essentially outgunned by the private sector.”
Technology Gaps and Operational Challenges
The IRS’s technological infrastructure presents another critical vulnerability. The agency still relies heavily on programming languages and systems developed in the 1960s, with some code dating back to the Kennedy administration.
“Imagine trying to enforce modern traffic laws using a patrol car built in 1962,” said Nina Olson, former National Taxpayer Advocate, during our interview at a tax policy conference. “That’s essentially what we’re asking the IRS to do with its current technology.”
This technological handicap is particularly problematic given the increasingly digital nature of both legitimate business and tax evasion schemes. Cryptocurrency transactions, international fund transfers, and complex business structures all require sophisticated analytical capabilities to track effectively.
“We’re often fighting 21st-century tax avoidance with 20th-century tools,” noted one current IRS IT specialist who requested anonymity due to agency policies on media communication. “When our systems can’t talk to each other efficiently, we miss connections that could identify patterns of non-compliance.”
The Enforcement Funding Paradox
Perhaps most troubling is how budget cuts have created a self-reinforcing cycle. As enforcement capacity diminishes, the perceived risk of facing consequences for non-compliance decreases, potentially encouraging more aggressive tax avoidance strategies.
Research by economists at the University of Michigan suggests that publicized reductions in IRS enforcement correlate with increased tax avoidance behaviors. Their analysis of IRS data found that each public announcement of reduced audit activity was followed by measurable increases in aggressive reporting positions on tax returns.
“There’s a contagion effect with tax compliance,” explained Dr. Chen. “When people believe others are paying less than their fair share without consequences, it erodes their own willingness to comply fully. Why be the only sucker paying the full amount?”
This dynamic helps explain why relatively small cuts to the IRS budget can have disproportionately large impacts on tax revenue. The deterrent effect of potential enforcement—which encourages voluntary compliance from millions of taxpayers—weakens as the probability of facing consequences diminishes.
Recent Developments and Contested Funding
The Inflation Reduction Act of 2022 attempted to reverse the trend of IRS underfunding, allocating approximately $80 billion over ten years to modernize the agency’s technology and rebuild its enforcement capacity. The legislation specifically directed the additional enforcement efforts toward high-income taxpayers, corporations, and complex partnerships—not ordinary Americans.
However, subsequent political battles have threatened this funding. The Fiscal Responsibility Act of 2023 rescinded approximately $20 billion of the previously allocated funds, and additional cuts have been proposed in ongoing budget negotiations.
“It’s become a political football,” noted former Commissioner Koskinen. “The economic case for robust IRS funding is ironclad—it reduces the deficit while ensuring everyone pays what they legally owe. But the political incentives still favor attacking the agency.”
Supporters of IRS funding reductions often frame their position as protecting ordinary Americans from an intrusive government agency. During my investigation, I interviewed several politicians who have advocated for cutting the IRS budget.
“People are struggling with inflation and rising costs,” argued state representative James Kalani, who has been vocal in his criticism of increased IRS funding. “The last thing they need is more government agents looking over their shoulder.”
The Reality Behind the Rhetoric
This framing, however, contradicts both the legislative language and the economic reality. The Inflation Reduction Act explicitly prohibited using the additional funding to increase audit rates for those earning less than $400,000 annually compared to historical levels.
Moreover, Treasury Department analysis indicates that strengthened enforcement focused on high-income non-compliance would primarily benefit compliant middle and working-class taxpayers, who currently shoulder a larger share of the tax burden because others aren’t paying what they legally owe.
“When the wealthy and corporations employ aggressive strategies to minimize their tax obligations beyond what the law allows, someone else has to make up the difference,” explained Wong, the Honolulu CPA. “Either the government runs larger deficits, or the burden shifts to those who can’t afford sophisticated tax avoidance strategies.”
Rebuilding Capacity: The Path Forward
Addressing the enforcement deficit will require more than simply restoring funding levels. The IRS faces significant challenges in rebuilding its workforce, particularly in specialized enforcement roles that require substantial training and experience.
“We lost a generation of institutional knowledge during the budget cuts,” Washington told me. “That’s not something you can replace overnight, even with unlimited funding. It takes years to develop the expertise needed for complex enforcement cases.”
The agency has begun implementing a strategic plan to rebuild capacity, focusing on four key areas: workforce development, technology modernization, taxpayer service improvement, and enhanced enforcement capabilities. Early results show promise, with the agency reporting improved phone service rates and the beginnings of enhanced enforcement activity targeting high-income non-compliance.
“It’s like turning an ocean liner—it happens slowly,” explained Charles Miller, a tax policy analyst at the Hawaii Tax Foundation. “But the direction has changed, and that’s significant.”
The Hawaiian Perspective
In Hawaii, the impacts of IRS underfunding have particular resonance. The state’s geographic isolation makes in-person assistance more challenging, with residents of neighbor islands often facing significant barriers to accessing IRS services. Additionally, Hawaii’s economy includes substantial cash-based tourism and service industries, creating specific compliance challenges.
“When the IRS lacks visibility into cash transactions, it creates an unlevel playing field,” explained Dr. Chen. “Businesses that properly report all income end up at a competitive disadvantage compared to those that don’t, while compliant taxpayers effectively subsidize those who aren’t paying their fair share.”
Local tax professionals have observed the decline in enforcement firsthand. “Ten years ago, there was a real presence and engagement from the IRS in our community,” noted Wong. “Today, that presence has diminished significantly, and sophisticated taxpayers have adjusted their behavior accordingly.”
Frequently Asked Questions: IRS Funding and Enforcement
| Question | Answer |
|---|---|
| How much money does the IRS fail to collect each year? | Approximately $600 billion annually in legally owed but unpaid taxes, according to Treasury Department estimates. |
| What is the return on investment for IRS enforcement spending? | Between $5-$9 for every dollar invested in general enforcement activities, and up to $20 per dollar for specialized high-income enforcement. |
| Has the IRS workforce increased or decreased in recent years? | Decreased significantly. The IRS has lost approximately 33,000 employees (about 35% of its workforce) since 2010. |
| How have audit rates changed for different income groups? | Audit rates for those earning over $1 million dropped from 8.4% in 2010 to below 2.5% in 2023, while audit rates for lower-income taxpayers have declined much less drastically. |
| How much funding did the Inflation Reduction Act allocate to the IRS? | Originally approximately $80 billion over ten years, with about $20 billion subsequently rescinded by the Fiscal Responsibility Act of 2023. |
| Will additional IRS funding increase audit rates for middle-class taxpayers? | The legislation explicitly prohibits using the additional funding to increase audit rates for taxpayers earning less than $400,000 compared to historical levels. |
| How old are the IRS’s core computer systems? | Many core systems date back to the 1960s, using programming languages and architecture developed during the Kennedy administration. |
The True Cost of False Economy
As I concluded my investigation, the fundamental contradiction at the heart of IRS budget cuts became inescapably clear: cutting the enforcement budget doesn’t save money—it costs money. Lots of money.
While reducing IRS funding might appear to save taxpayer dollars on paper, the practical effect is to increase the federal deficit while shifting more of the tax burden to compliant middle-class taxpayers who lack the means to engage in sophisticated avoidance strategies.
The path forward requires moving beyond the politically expedient rhetoric of “cutting the IRS” to recognize the agency’s essential role in ensuring a fair and functional tax system. Proper funding for enforcement isn’t about growing government—it’s about making sure existing tax laws are applied effectively and equitably.
As Leilani Kama prepared to close the Honolulu field office for the evening, her stack of uninvestigated cases still looming, she offered a simple perspective that cut through the political noise: “This isn’t about politics. It’s about fairness. When someone doesn’t pay what they legally owe, someone else has to make up the difference. Usually, it’s the people who can least afford it.”
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