Back in December 2024, the IRS released IR-2024-310 indicating that billions of dollars were recovered. The IRS indicated that “... The IRS has now recovered $4.7 billion from new initiatives underway. This includes more than $1.3 billion from high-income, high-wealth individuals who have not paid overdue tax debt or filed tax returns, $2.9 billion related to IRS Criminal Investigation work into tax and financial crimes, including drug trafficking, cybercrime and terrorist financing, and $475 million in proceeds from criminal and civil cases attributable to whistleblower information.”

This is a remarkable dollar amount recovered by the IRS where enforcement activities are around 45% of its budget. The IRS is an organization that generates more funds than it cost to operate. According to the Taxpayer advocate legislative recommendation #2,  the IRS collected about $4.1 trillion on a budget of about $11.9 billion (ROI of 345:1). However, the vast majority of payments are made on time around 85% per IRS report – Return on Investment: Re-Examining Revenue Estimates. Then, we should calculate the real return of investment on the enforcement activities based on the IRS report mentioned above.

  1. Enforced and late payments is around $63B
  2. Only enforcement should be around $39B annually as estimated $390 billion tied to enforcement between FY 2024 and FY 2034
  3. The enforcement budged is around 45% of the $11.9 billion equals to $5.6 billion
  4. Then, the return on investment for enforcement should be $39 billion divided by $5.6 billion equals around 7 times
  5. Note that there are several studies that indicate that increased enforcement for higher earners will generate a much higher potential return on investment such as the working paper A Welfare Analysis of Tax Audits Across the Income Distribution that points that 10% top income would generate a 12 times return (versus normal audits having return around 5 times).

As tax professionals, we interact often with IRS agents and other tax authorities’ agents. We acknowledge their professionalism and hearing the taxpayer (or us as their representatives) but we sometimes feel that there is an excessive enforcement pressure on individuals and small businesses, while there is an absolute lack of control and profound inefficiencies at the government level. The IRS is trying to fill the bucket with a teaspoon but there is a huge hole in the bucket, even in IRS programs like the earned income credit were $22 billion are distributed erroneously each year.

We would list some examples below:

  • FBI report on Covid fraud – The U.S. Small Business Administration inspector general estimates $136 billion in fraud from the EIDL and $64 billion in fraud from the PPP.
  • Committee on Oversight – The Department of Labor (DOL) Office of Inspector General (OIG) estimates that at least $191 billion in pandemic UI (unemployment insurance) payments could have been improperly paid
  • U.S. Government Accountability Office – U.S. GAO estimated that the IRS earned income program has around $22 billion claimed erroneously annually.
  • U.S. Government Accountability Office –  U.S. GAO estimated that the federal government could lose between $233 billion and $521 billion annually to fraud alone.

We applaud the IRS efforts recovering taxpayer’s funds and we would love to see an increase in government efficiency. Let’s avoid being penny wise and dollar fool.