Cutting funding for the agency responsible for collecting federal revenue costs taxpayers more than it saves. A new report from the Treasury Inspector General for Tax Administration (TIGTA) shows why.
TIGTA found that the IRS accepted 473,361 tax returns with “questionable” claims for a new deduction during the 2026 filing season. Together, those returns claimed approximately $976.8 million in deductions, with an estimated potential tax effect of $122.4 million.
The deduction was one of four new tax breaks included in last year’s One Big Beautiful Bill Act. It allows eligible taxpayers to deduct interest on loans for certain new, U.S.-assembled vehicles. Nearly one-third of the returns claiming that deduction were flagged as questionable. According to the report, the IRS lacked effective controls to verify whether the vehicles qualified.
TIGTA found that the questionable returns raised issues that stronger processing controls could have identified before acceptance. The IRS cited concerns about the legal implications of rejecting otherwise valid returns. As of August, the agency had not created a plan to review the questionable claims, leaving hundreds of thousands of potentially improper deductions without any defined review process.
The IRS’s shortcomings don’t stop there. TIGTA made two recommendations to strengthen processing controls for questionable returns. The IRS disagreed with both, saying it had already fixed the problems. But TIGTA found that the agency’s changes did not fully resolve the underlying issues. The IRS did agree to a separate recommendation to develop a plan for reviewing potentially improper claims after processing.
These problems are occurring as the Trump administration is sharply reducing the IRS workforce. A separate TIGTA report found that 31,273 employees left the agency between January 2025 and January 2026, many through the administration’s resignation and retirement incentives. Even after accounting for new hires, the agency’s workforce shrank by 28%. Those departures included roughly one-third of the IRS’s revenue agents, who conduct audits, and tax examiners, who review returns for accuracy.
The administration’s IRS cuts began causing problems almost immediately. IRS employees spoke out during the height of the resignations, saying the agency had been forced to abandon plans for a number of audits. A Bloomberg analysis warned that the loss of staff would reduce federal revenue collections and embolden taxpayers to avoid paying what they owe.
Cutting the IRS is expensive. Weaker tax enforcement means less revenue collected and larger federal deficits at the expense of honest taxpayers. That is not speculation. The Congressional Budget Office estimated that rescinding $20 billion in IRS funding would reduce federal revenue by $44 billion over ten years, increasing the deficit by $24 billion. In other words, every dollar cut from the IRS budget would cost taxpayers more than twice as much in lost revenue over a decade.
More recent IRS funding cuts are projected to have similar results. The Consolidated Appropriations Act of 2026, enacted on February 3, rescinded $11.7 billion in IRS funding. A separate CBO analysis estimated that the loss of funding will reduce federal revenues by $38.6 billion over the next decade, costing $3.30 in lost revenue for every $1 in funding cut.
Adequately funding the IRS should have bipartisan support. Ensuring that taxpayers pay what they legally owe reduces deficits and helps maintain a fair tax system. Weakening enforcement only benefits those who seek to avoid their tax obligations, while shifting more of the burden onto everyone else.
The United States’ national debt has reached $40 trillion and is still climbing. Addressing that challenge requires reining in excessive spending, as we often write about, but also ensuring that our tax collection system is reliable and efficient.
As a budget watchdog, we support eliminating waste and unnecessary government spending. But kneecapping the IRS won’t help. It will worsen the deficit problem these cuts are supposed to solve. Taxpayers deserve an agency that can reliably collect revenue and hold those who violate tax laws accountable. Congress should provide the IRS with the resources it needs and ensure that questionable claims receive appropriate scrutiny. The IRS should be a strong, objective, nonpartisan institution, not a political talking point.
