Niles Elber Comments on Changes Within IRS in Financial Planning

Financial advisors, tax professionals and their clients are facing an IRS that is moving in a polar opposite direction from the agency that was bulking up on enforcement only a few months ago.

In the first few months of President Donald Trump's second term, Treasury Secretary Scott Bessent and Elon Musk's Department of Government Efficiency have presided over a halting series of mass staff layoffs that could eventually reach as many as tens of thousands of employees and the abandonment of a crackdown on wealthy tax dodgers under President Joe Biden's team. Court cases may block some of the actions, but they're already having an impact.

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The budget- and staff-cutting efforts thus far certainly amount to "a shock to the system" of a size unmatched over the career of Niles Elber, a Member in Caplin & Drysdale's Washington, D.C.-based office who has represented clients in tax matters for 26 years, he said. Despite yet unknown answers to questions about the extent of cuts and availability of taxpayer information to outside parties, a "conservative and cautious tax advisor" should counsel clients to "strive to meet their tax compliance obligations," Elber said in an interview. 

"You don't want the system turning on you, if, for some reason, you thought you could get away with it," he said. "Now is not the time to be lax in your tax compliance efforts."

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At a basic level, dialing the number of IRS enforcement personnel "back to more traditional levels" will mean that fewer people "are going to fall under the microscope" of an examination or audit, Elber said. The so-called tax gap between the estimated liability and the amount collected each year — a yawning $696 billion in 2022 — could grow wider still.

The "ability to create a real deterrent" will "substantially go by the wayside when people realize that there's very little out there to keep people honest," Elber said.

"The way that you reduce the tax gap is by enforcement," he added. "It's boots on the ground who are working with the data analytics that the IRS has used as a mainstay of enforcement activity at least for the last decade or so. You're losing a substantial portion of the boots on the ground. … I don't think anyone knows the extent to which tariffs will potentially fill some of the basket that will be left unfilled."

Axing 20% of the IRS workforce would be "catastrophic to the enforcement function," Elber said. At a 50% level, then "I'm not sure what function the IRS is serving anymore" besides processing returns and checks, he said.    

"I cannot recall a comparable situation during my career," Elber said. "I can't comprehend how the IRS functions with half the staff they've got."

That doesn't mean that advisors and their clients should stop being vigilant about their taxes, however. The thinned IRS ranks of audit and enforcement teams will likely exercise the same types of probes as they have over the past decade or so, Elber said.

"You can expect a rather grueling examination," he said. "That comes down to, basically, the audit lottery. You don't know at the end of the day how you're going to fare. Your chances are better than a year ago, but it's certainly not a situation where there's no risk."

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