IRS deterrence effect is under fire

DOGE has started firing thousands of IRS workers, right in the middle of tax season.

Why it matters: The move is likely to decrease the effect that restrains wealthier Americans from underreporting their taxable income.

The big picture: A new paper from Policy Impacts calculates that the government ends up receiving $12 in extra revenue for every $1 it spends auditing top-decile earners, thanks in large part to what the paper calls the "individual deterrence effect."

How it works: Enforcement actions from the IRS result in collections of about $63 billion, per the Bipartisan Policy Center, but end up increasing the total amount paid in tax by much more than that.

• Taxpayers are deterred from underreporting by the fear that they might face an audit.
• More importantly, taxpayers are significantly less likely to underreport in the years after receiving an audit.
• Effectively, the IRS collects extra money for many subsequent years even without doing any more audits.
• The deterrence effect, as Policy Impacts puts it, produces at least three times more revenue than the initial audit.

The intrigue: Most American households get a refund at tax time, which means they want the IRS to process their return and send out their refund as quickly as possible.

• Richer Americans, by contrast, including most of President Trump's billionaire-dominated Cabinet, generally have a much more adversarial relationship with the agency.
• Commerce Secretary Howard Lutnick said this week that Trump's goal is to "abolish" the IRS altogether.

The bottom line: If you're worried about being audited by the IRS, you're probably delighted by the prospect that its enforcement action is going to be curtailed.