IRS Audit Revenue Fell 35% After Staff Cuts, Watchdog Finds

The IRS cut its auditing staff last year as part of a cost-cutting drive, but the move appears to have backfired on the government's bottom line, according to a new report from the Treasury Department's Inspector General for Tax Administration.

Revenue from audits plunged 35% in fiscal year 2025, the report found, meaning billions of dollars in taxes went uncollected. The drop coincides with a 27% cut in IRS enforcement and collection staffing, part of Elon Musk's push to boost government efficiency.

"The downstream effects of these reductions are likely to become more apparent over time," the inspector general wrote.

The IRS had expanded its auditing ranks under the Biden administration in an effort to collect more of the estimated $696 billion in taxes that go unpaid each year, largely because people and businesses under-report income. That staffing increase led to a 41% jump in audit-related revenue in 2024 — a gain that was largely reversed last year. More than 25,000 IRS employees were laid off or took early retirement in 2025, including about 3,600 tax examiners.

Audits generated $10 billion in tax revenue in fiscal year 2024, but that fell to $6.5 billion in 2025.

"Defunding the IRS is not a money-saving proposition because you have fewer employees," said Natasha Sarin, who served as a counselor on tax policy to former Treasury Secretary Janet Yellen. "It is a money-losing one, because you do a less good job of collecting taxes."

The inspector general noted the overall revenue loss could be larger still, since audits are also meant to encourage voluntary compliance. "You're less likely to speed when you know that there's a cop on the beat," said Sarin, now a professor at Yale Law School.

IRS Chief Executive Officer Frank Bisignano has defended the agency's enforcement record, telling lawmakers earlier this year that the IRS is using technology to target audits more efficiently.

The Biden-era staffing increase had focused scrutiny on wealthy individuals and partnerships, but that oversight fell sharply as auditors were let go. Audits of partnerships dropped 76% between 2023 and 2025. "Disproportionately, this is about the tip-top of the [income] distribution," Sarin said. "Something like the top 1% of earners are responsible for something like a third of the tax gap."

Staffing levels continued to decline in the first four months of the current fiscal year, and the Trump administration has called for additional funding cuts at the agency in 2027.