Entrepreneur
The IRS is rapidly getting much, much smaller.
In February, the agency laid off roughly 7,000 probationary employees from its 90,000-person workforce as part of the Trump administration’s widespread effort to reduce the size of the federal government. Then, in early March, the Associated Press reported that the IRS was drafting plans to cut its staff by as much as 50%.
That’s a big change. A cut that big would put IRS staffing at 44% less than it was in 2020 and 60% less than it was in 1995, the IRS Data Book shows.
On top of the staff reduction, the IRS budget is also shrinking. The federal spending bill President Trump signed on March 15 reclaimed $20.2 billion in IRS funding from the Inflation Reduction Act. And technology CEO Sam Corcos, who is working with the Department of Government Efficiency at the IRS, has said as recently as March 20 that billions of dollars’ worth of contracts within the agency’s budget can be eliminated.
What does this mean for entrepreneurs?
A lot of the specific effects on taxpayers will depend on how the administration and Congress move to reshape the IRS. Still, there are a few facts that can guide you as you make investment and tax-strategy decisions.
Entrepreneurs can worry less about unwarranted audits
This had become a real concern under the Biden administration. The original version of the Inflation Reduction Act included $46 billion earmarked for increased tax enforcement, money the IRS said it planned to use to go after wealthy taxpayers it believed weren’t paying what they owed. While the stated goal was to go after tax cheats, in reality, the audit rates on these groups were likely to go up across the board. This seems unlikely as IRS funding drops.
This is especially good news for entrepreneurs who use partnerships. Under the Biden plan, the IRS said it wouldn’t increase the audit rates on people earning less than $400,000 per year, focusing instead on partnerships and high earners. Lots of entrepreneurs and investors — including plenty who don’t earn $400,000 a year — use partnerships. If this enforcement strategy had continued, these taxpayers were likely to face a greater likelihood of an audit.
Audits are time-consuming, stressful and often costly, even for taxpayers who haven’t done anything wrong. In my experience working with thousands of entrepreneurs over the years, the accounting fees during an audit can ran/ge from $10,000 to $30,000, and that’s before the cost of increased tax payments, penalties and interest from an adverse finding.
Related: 4 Tax Strategies Every High-Earning Entrepreneur Needs to Know for 2025
Taxpayer support will go from bad to worse, at least temporarily
Taxpayers and tax preparers have been dealing with terrible customer service from the IRS for years.
If you’ve ever called into the IRS with a question, chances are you sat on hold for ages. The average wait time was 13 minutes in 2023, with just about half (51%) of calls reaching a human. If you’re familiar with call center industry standards, you’ll be shocked to know that even that low level of service was a big improvement from 2022, when it took more than 28 minutes for the IRS to answer a call on average and just 21% made it through to humans.
Part of the improvement came from the IRS adding thousands of customer service reps at the end of 2022. A large workforce reduction at the agency will likely create a short-term return to long waits for phone assistance. If the IRS continues to modernize, however, it may eventually be able to deliver faster and better-quality service with a smaller staff. Using AI to augment live support, for example, could help taxpayers resolve common questions quickly without ever speaking with a live agent. AI could also allow the IRS to accelerate upgrades to other aspects of its outdated systems, such as processing paper returns and simplifying outdated computer systems.
Related: How to Get the Most Money Out of Your Side Hustle During Tax Season, From an Expert Who Raised $75.2 Million to Make Filing Easier
While the government’s move to reimagine the IRS is a positive development for entrepreneurs, it’s important not to get complacent. The IRS isn’t going away, and neither is the tax code. Every entrepreneur needs to make sure they and their businesses comply with the tax law. But don’t pay more than you are required to pay.
Entrepreneurs have access to lots of government tax incentives designed to promote growth and reinvestment. Use them. After all, it’s your money. Why not invest it in a way that helps you builde wealth while reducing or eliminating your taxes? The best way to do this is to work with a certified public accountant (CPA) who understands the tax code and will proactively share ideas to help you become someone the tax law favors. You’ll be best served by using the same CPA firm for your tax strategy, tax returns and any audits, should you ever face one.
When choosing a CPA, look for one who isn’t afraid of the IRS. If you aren’t sure, try asking, “How many IRS audits have you handled? If I get audited, what would you do?” If they don’t sound confident, it’s time to look for someone else. And for added peace of mind, ask your CPA about putting an audit protection plan in place. Ideally, this is a simple fee added on to the cost of your tax return preparation that will help you avoid the high cost of an audit if you end up facing one.
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