From an outsider’s perspective, the Internal Revenue Service’s business modernization program has had a seemingly Sisyphean quality to it since its late 1990s launch, drawing criticism from lawmakers and government watchdogs for cost overruns, delays and continued reliance on obsolete legacy tech.

But over the past decade-plus, the tax agency’s team of tech professionals believe substantial strides have been made in ushering IRS systems to a far more digitized and better place, particularly with the support of the Inflation Reduction Act and the billions of dollars the 2022 law directed to modernization.

That momentum is in danger of coming to a screeching halt in the months ahead, as Elon Musk’s Department of Government Efficiency continues its slashing of the federal workforce. The IRS has been targeted early and often in the nascent days of the second Trump administration, with more than 7,000 probationary employees dismissed from the agency and promises of much more to come.

Late last month, DOGE placed 50 IRS IT staffers at the Senior Executive Service level on administrative leave. Most of those employees were associate chief information officers, with expertise covering cybersecurity, modernization, applications, contracts, networks, and data center operations, among other IT-related areas, according to an agency IT executive who left the IRS in March.

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“There’s no criteria or rationale that appears to be evident to anyone at the IRS that’s been talking about this,” said the source, referring to DOGE’s job cuts.

The Treasury Department says these workforce reductions are a corrective to the previous administration’s “hiring surges,” and have been done in the name of efficiency and improved customer services.

In interviews with FedScoop, however, former high-ranking IRS executives shared several concerns about the effect these mass workforce reductions will have on the agency and its “remarkable progress” in modernizing its systems, including how cuts could hinder innovation, reverse advancements on artificial intelligence, embolden potential tax cheats and result in a much less efficient agency.

Fraud fighters

Few people understand the impact drastic staff reductions at the IRS could have on modernization better than Barry Johnson. For 37 years, Johnson served the tax agency in a variety of roles, most recently as chief data and analytics officer. He left the IRS in January and is now a nonresident fellow with the Urban Institute and Brookings Institution’s Tax Policy Center.

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As the agency’s CDO and analytics chief, Johnson oversaw a division called Research, Applied Analytics, and Statistics, or RAAS. That unit provides technical consulting services to all of the agency’s operating divisions, working to explore emerging technologies and methods to inform potential business applications and assess challenges and opportunities.

“Outcomes can include things like intelligent automations, better statistical models that more accurately identify potential reporting issues on tax returns, and analytical tools that provide bigger picture/network analyses that help identify emerging tax administration issues, including scams and schemes,” Johnson said of RAAS’s work.

In Johnson’s view, the IRS’s “remarkable progress in modernizing, despite tight resources over most of the last 15 years or so” can be traced in part to a RAAS-created data warehouse built in 1996 to support research and innovation in tax administration and tax policy research.

One team within RAAS, for example, specialized in behavioral science, using those insights to nudge taxpayers to claim benefits they were entitled to and help prevent at-risk taxpayers from becoming non-compliant, Johnson said.

The IRS’s work with advanced analytics put the agency “at the forefront of identifying fraudulent returns filed by identity thieves and … preventing billions of dollars in fraudulent refund claims from being paid out,” he said.

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Data and analytic initiatives of that kind have gone a long way toward leveling the playing field between the IRS’s limited audit staff and filers with complex finances backed by legal representation only the rich can afford.

In July of last year, the IRS announced that $1.3 billion had been collected from 1,600 wealthy taxpayers who had skirted their debts. That initiative was made possible by the IRS’s investments in data to identify under-reporting in taxes, and “because additional resources had allowed [the agency] to bring on staff needed to pursue this unpaid tax,” Johnson said.

A Treasury Department spokesperson told FedScoop that “staffing reductions that are currently being considered at the IRS will be part of — and driven by — process improvements and technological innovations that will allow the IRS to collect revenue and serve taxpayers more effectively.”

“The roll back of wasteful Biden-era hiring surges, and consolidation of critical support functions are vital to improve both efficiency and quality of service,” they continued. “The Secretary is committed to ensuring that efficiency is realized while providing the collections, privacy, and customer service the American people deserve.”

In Johnson’s opinion, further reductions to the IRS workforce would “be a boon to sophisticated taxpayers” skilled at ducking tax laws. Losing that tax revenue wouldn’t be the first DOGE-induced move that seemingly undercuts longstanding agency priorities.

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Roadmap to modernized systems

Though the IRS has been dinged for its labored transition away from legacy IT systems — including by inadvertently directing IRA funds for modernization toward legacy maintenance — there was a detailed plan in place to accelerate the digital shift.

According to the recently departed IT executive, the IRS has been following a roadmap for leveraging new technologies and embracing more common platforms, including Salesforce and ServiceNow. That approach, the source said, would allow the agency to greatly reduce the risks posed by using legacy systems.

“It’s a large portfolio … but we actually had a very cohesive plan to be going live this summer with a major, major part of the [Individual Master File] modernization,” the source said. There was also a “very distinct plan” within the agency’s Transformation and Strategy Office “for delivering tons of services that would allow us to be more like a commercial bank, where we were doing everything online, and you have bots and agents that can help you to get through things faster and so forth.”

Johnson said providing bank-like online services would lead to faster, more accurate service for taxpayers. And modern data systems would also enable the IRS to “more quickly integrate changes Congress makes to the tax system in ways that will reduce confusion, make it easier for taxpayers to comply and provide closer to real-time data and statistics on the update or impact of changes,” he said.

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“So failing to modernize will likely mean that wait times for callers will again increase, new features and services will not be rolled out as hoped, and in general a return to (or even increase) in the challenges taxpayers experienced prior to the IRA investment,” Johnson added.

DOGE shut down the Transformation and Strategy Office last month, according to the former IT executive. Of the 80 or so employees in the office — who were “hand-picked” to get the commissioner’s “vision implemented as fast as possible” — a few lower-level staffers were assigned to different agency components, while the rest either retired, took the administration’s deferred resignation offer or were laid off, the source said.

Despite that office’s closure, the IRS maintains that its modernization plans are ramping up. The Treasury spokesperson told FedScoop that the department has pulled together “a team of long-time IRS engineers who have been identified as the most talented technical personnel.”

“Through this coalition, they will streamline IRS systems to create the most efficient service for the American taxpayer,” the spokesperson added. “This week the team will be participating in the IRS Roadmapping Kickoff, a seminar of various strategy sessions, as they work diligently to create efficient systems. This new leadership and direction will maximize their capabilities and serve as the tech-enabled force multiplier that the IRS has needed for decades.”

A source familiar with the initiative said the roadmapping team is being led by a career IRS chief technology officer — emphasizing that it is not someone from DOGE. The kickoff event is described in a Wired story published last week as a “hackathon,” though the source pushed back against that characterization.

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“A cornerstone of this modernization effort includes the implementation of a unified Application Programming Interface (API) infrastructure,” the source said. “APIs are secure, industry-standard technologies that facilitate effective and secure communication between various IRS systems. By consolidating systems through a robust API layer, the IRS will significantly improve its ability to manage taxpayer information securely, streamline data governance, enhance fraud detection capabilities, and reduce operational complexities.”

AI, data and efficiency

Under former Commissioner Danny Werfel, the IRS leaned into the use of AI tools, leveraging the technology to automate, lower error rates and scrutinize potential tax evaders. DOGE has plans of its own for AI across federal agencies, though much of the reporting about the Musk-led group’s aims centers on replacing humans with the tech.

AI under Werfel and his predecessors took on various forms. Johnson said the IRS had been using chatbots to interpret taxpayer questions and provide “the best pre-curated response.” AI tools also used data that natural language processing produced from scanning call transcripts and text to identify pain points for customers and allow agency teams to address them. And the technology has been utilized to spot scams and schemes more quickly.

Whether the IRS in the DOGE era continues down a similar AI path remains to be seen. Charles Rettig, the IRS commissioner from 2018 to 2022, said during an ACT-IAC webinar last week that the agency had plans to “reskill the workforce” for the AI age. DOGE doesn’t appear to be following that game plan.

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“Automation can leverage human resources but not replace human resources,” Rettig said. “We were all in on getting the right technology, as much technology using AI to make ourselves better and more efficient — but not reducing the workforce.”

Whatever direction the IRS takes AI policy under DOGE, Johnson said it’s crucial for the agency to have proper oversight mechanisms in place to ensure responsible use.

“Subject matter experts need to be engaged in all phases of the AI lifecycle — development and training, implementation and then monitoring, evaluation and maintenance,” he said. “For AI use cases that impact individual rights, such as those that [support] audits, I believe that keeping a human in the loop who has a significant oversight/decision making role is essential to ensuring the AI functions as intended.”

“One impact of firing so many people is that those left behind may not have the bandwidth to fulfill these roles,” Johnson added, “delaying the rollout of innovation and potentially putting those who will be subject to the AI applications at risk.”

The former IRS IT executive said DOGE’s firings so far have been based on conclusions from “talking to people at the very, very, very top and at the very, very, very bottom.” The 50 IT executives who were put on administrative leave last month were skilled, technical strategists that had “the 100,000-foot view of what we’re doing,” the source added, and without taking that kind of expertise into account, DOGE is missing “the bigger picture.”

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The Treasury spokesperson said the 50 IT executives, who were placed on “temporary paid administrative leave,” were “primarily non-technical personnel who were in technical decision-making roles.”

DOGE’s firings earlier this year included newly hired data scientists, employees who Johnson said were brought into the agency specifically to advance and implement numerous innovations.

“These innovations would have made [the] IRS more efficient, supporting cost savings in the future while still meeting the ever-growing needs of tax filers,” he said. “Improved chatbots reduce the number of phone calls that require a live assistor; better, faster information available to phone assistors means they can handle more calls per hour; better compliance models reduce the number of no change audits and allow auditors to focus on the highest dollar non-compliance. Automation and the advantages of better data integration reduce repetitive processes and makes existing workers more efficient.”

A potentially “erroneous” filing year

Despite the massive loss of technical brainpower over the past few months, the average taxpayer probably won’t know what they’re missing this filing season. But next year could be a different story.

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The longtime IRS IT executive said the planning cycle for the next filing season begins now, “a massive orchestration” that brings together business units and informs tech teams about everything from required software upgrades to cybersecurity patches. Every one of those updates must be integrated, tested and delivered.

Come late summer, the source expects the tax preparation industry to start noticing that they don’t have critical information provided by the IRS to update their systems with revised code and new tax credits. Without that information, taxpayers a year from now could be looking at all sorts of “erroneous” outcomes, they added.

“My prediction is like in August, they’re going to start realizing that there are many balls dropped. There are systems that haven’t been worked on or planned for,” the source said. “The people that do the planning are the ones that they got rid of.”

Michael Welu worked at the IRS for decades as a specialist in helping agents identify and investigate possible tax crimes. In an agency known for offices working in their own silos, Welu had the rare ability to move between divisions, dissecting and learning each office’s particular customs and procedures. But that experience had its own consequence for Welu: Seeing disparities in how the separate divisions treated different tiers of taxpayers left him exasperated and helped drive him into early retirement.

For more than 30 years, Welu watched the agency struggle with budget cuts and dwindling staff. What troubled Welu, he says, went deeper than just resource constraints.

During his time at the IRS, he says, upper management in the division tasked with auditing large corporations and ultrawealthy people — the Large Business and International Division — was quick to dismiss any suggestion that a powerful taxpayer may have committed a crime, and commonly discouraged frontline agents from pursuing big cases. This stood in deep contrast to the office that policed small businesses and self-employed people, which was empowered to — as Welu saw it — take an appropriately firm stance toward taxpayers breaking the law, even if they were dealing with far smaller dollar amounts.

“I was putting butchers, bakers and candlestick makers in jail, but the big stuff we really wanted to go after was being ignored,” Welu told the International Consortium of Investigative Journalists. “It could be the most egregious, ridiculous scheme and they were just not interested.”

In 2022, Congress approved a Biden administration proposal to give the IRS $80 billion to improve customer service and strengthen its efforts to enforce tax law on wealthy individuals and large corporations. President Joe Biden has repeatedly pledged that under his administration the IRS will use its new money to target illegal tax schemes by these high-end taxpayers, who are believed to do an outsize portion of tax cheating.

ICIJ found that the agency will need more than new funding to fulfill the president’s promise. The IRS’s Large Business and International Division, or LB&I, takes a comparatively light approach toward the country’s most powerful taxpayers, according to a review of records and interviews with current and former agents. In the agency’s own comments to ICIJ, the IRS suggested that large corporations break the law less often than other types of businesses. ICIJ found that the agency treats these powerful taxpayers accordingly.

New data obtained by ICIJ shows that over the past five years, LB&I flagged no more than 22 instances of possible tax crimes for the agency’s criminal investigators to review further — out of trillions of dollars in annual income from large corporations and ultrawealthy people that the office oversees. During the same five years, the IRS office that covers small businesses and self-employed people flagged roughly 40 times more possible crimes, sending criminal investigators 848 referrals. This office is larger than LB&I and deals with easier cases, but many of the individuals and businesses it audits deal in dollar amounts too small to be considered for a criminal referral.

The IRS’s civil divisions, which make up the vast majority of the agency’s workforce, are supposed to flag egregious tax cheating cases for potential prosecution from the volumes of returns they process and audit. The comparatively small number of referrals from LB&I has frustrated officials within the Criminal Investigation Division, who say they’re often unsupported in identifying cases involving the biggest taxpayers.

I was putting butchers, bakers and candlestick makers in jail, but the big stuff we really wanted to go after was being ignored.

— former IRS agent Michael Welu

In response to questions from ICIJ, the IRS said that comparing criminal referrals between divisions is misleading, adding that LB&I conducts “the most complex audit situations the IRS faces, and there are unique circumstances around each examination.”

The agency said that large corporations generally have a limited ability to commit crimes, since they are audited by independent accounting firms and often have disclosure requirements. It said that LB&I ensures its agents have the training and resources to identify tax crimes and make referrals when necessary. The agency emphasized that it “is in a period of transition” and that it takes time to hire staff and strengthen its capabilities in the most complex areas of tax enforcement.

Welu and other agents said LB&I is not a monolith; some offices and managers within the division are more willing to stand up to high-income earners than others. Current and former agents pointed to various reasons for the office’s unique approach, including a separate set of audit rules and a sort of learned helplessness from years of fierce pushback by wealthy taxpayers amid government budget cuts. The movement of IRS officials in and out of the major accounting firms that represent big taxpayers has also raised questions of fair treatment.

Whatever the ultimate explanation, Welu and several current IRS agents told ICIJ that LB&I’s enforcement style encourages continuous egregious behavior by the most well-heeled taxpayers, who know the office will almost certainly not elevate reports of tax dodging to criminal investigators. A Treasury Department inspector general has opened an inquiry into whether LB&I gives large corporations preferential treatment, according to people with knowledge of the matter.

Tax evasion by the ultrarich is a key element in Oxfam International’s recent forecast that the world will soon see its first trillionaire. Experts say the U.S.’s failures to address high-end tax evasion have contributed to worsening global inequality.

“Normal taxpayers are scared of the IRS — they fear real consequences,” one current LB&I agent, who spoke on the condition of anonymity, told ICIJ. “These highly wealthy people, it’s more like a game to them.”

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Different rules for the wealthiest

LB&I is the most important office in the IRS’s — and President Biden’s — commitment to ensure billionaires and multinational corporations pay their fair share. The IRS says the amount of U.S. taxes left uncollected could exceed $600 billion per year. And the Treasury Department, the IRS’s parent agency, has estimated that wealthy people commit an outsize share of tax evasion. As of 2019, the top 1% of Americans were estimated to be responsible for 28% of the “tax gap” — defined as the difference between taxes that are owed and collected. This number added up to an estimated $163 billion annually.

LB&I is seen as an elite office within the IRS and a destination for more experienced and sophisticated agents. The office has 5,700 employees. LB&I is leading a new push to improve oversight of investment partnerships, like hedge funds and private equity firms, that alone account for trillions of dollars in income each year and are known to operate in gray areas of tax law to provide substantial benefits to their investors.

LB&I agents who want to audit such elite taxpayers effectively have a difficult job. They not only must be excellent accountants but also must have knowledge of arcane corners of tax law, investigative skills and experience in financial forensics. Caseloads are often heavy, and incentives can tilt toward closing audits quickly. When agents find evidence of serious cheating, the easier win is to nudge a taxpayer to pay the government its owed tax rather than attempt to add on civil or criminal penalties. A 2019 report by the IRS’s inspector general examined dozens of cases where LB&I officials declined to impose civil penalty fees on taxpayers who had underpaid the agency by more than $10,000. Even when auditors find an egregious case, they may decide against crafting a criminal referral — known internally as a fraud referral — which can add significant time to an audit for an uncertain future payoff.

Welu and other current and former agents argue that this has been happening more than it should. The office, agents say, has established a soft playbook around reporting possible crimes that gives high-end taxpayers confidence that, if they’re audited, the highest cost of getting caught cheating will amount to little more than paying the taxes they owed in the first place. Although federal agents frequently deal with a degree of confrontation, it’s often discouraged at LB&I by timid managers and gun-shy attorneys, according to current and former agents.

Obtaining information about income, deductions and money movements is crucial for building a tax case. Although IRS agents have the power to send legally binding demands for information — known as summonses — LB&I agents issue comparatively few of them, instead relying more on information requests that do not carry the force of law, according to current and former agents. Unlike with these softer requests, a taxpayer who ignores a summons can be criminally prosecuted. A half-dozen current and former IRS agents told ICIJ that LB&I agents can go their whole careers without sending a summons.

An agent within LB&I, who spoke on the condition of anonymity, described an office culture averse to summonses. He said that as a new agent wanting to take a more forceful posture toward suspected tax cheats, he found little help. “When I asked around about how to craft a summons, no one was familiar with it,” he said. “I was asking experienced agents who had been there for a while and it was something they hadn’t done.”

The agent said managers within LB&I appear to fear that issuing a summons would upset the esteemed lawyers and accountants representing the country’s wealthiest taxpayers.

In one publicly reported instance, an auditor in LB&I’s Global High Wealth unit who merely mentioned the possibility of a summons while auditing a billionaire was forced to apologize after the billionaire’s representatives complained to the IRS, according to ProPublica.

Welu says the reluctance to issue summonses generally came from the higher levels of management. Welu would attempt to overcome this resistance by preparing a united front of lower-level attorneys to support taking steps like sending a summons for bank records or compelling a taxpayer to be interviewed by agents, he says.

“It’s standard practice in Small Business [and Self-Employed Division], and they don’t think twice about it,” Welu told ICIJ. “But in LB&I, oh my god, I’d have to round up a coalition of support. I’d have to pave the road.”

ICIJ found that LB&I’s written rules impose layers of restrictions on issuing summonses, compared with the Small Business and Self-Employed Division.

Other people don’t get those protections … It’s only large corporations and the wealthiest individuals.

— Nina Olson, former IRS national taxpayer advocate

These extra steps for LB&I agents include sending two warnings to taxpayers who have not complied with a voluntary information request before sending a summons, according to agents and an ICIJ examination of the IRS handbook. LB&I auditors are also required to, at the outset of an audit, share an audit plan with taxpayers, allow them to suggest changes to the impending audit, and request they sign the plan.

Nina Olson, who served for 18 years as the IRS’s national taxpayer advocate, tasked with ensuring the fair treatment of taxpayers, says that LB&I’s audit steps provide powerful actors with more information earlier that they can use to defend themselves. “LB&I has a bespoke audit process,” Olson, who left the IRS in 2019, told ICIJ. “With LB&I, you get a custom-made suit. With the Small Business and Self-Employed Division, you get it off the rack whether it fits you or not.”

While at the IRS Olson tried unsuccessfully to get the small business division to adopt the extra steps taken in LB&I audits, which she says provides taxpayers a greater level of transparency and due process.

“Other people don’t get those protections,” Olson said. “It’s only large corporations and the wealthiest individuals.”

‘An ingrained culture’

One of the most recent examples of the U.S. government at least attempting to pursue a multinational corporation for alleged tax crimes was a major investigation into manufacturing giant Caterpillar, which used aggressive offshore maneuvers to avoid hundreds of millions of dollars in taxes. In 2017, federal agents, including IRS criminal investigators, raided three Caterpillar facilities in Illinois. But the following year, the criminal investigation was abruptly halted amid circumstances now under investigation by two Democratic U.S. senators. The senators are seeking information on possible political interference in the investigation by lawyers hired by Caterpillar, which included William Barr, who served as President George H.W. Bush’s attorney general and would later hold the same post under President Donald Trump.

LB&I did refer Caterpillar to IRS criminal investigators, but it did so only after the Criminal Investigation Division notified LB&I that it had opened its own inquiry into the corporation’s possible tax dodges, according to two longtime IRS agents familiar with the case.

“It’s Caterpillar — LB&I had been auditing them forever. How could they have missed these issues?” a supervisory agent within the Criminal Investigation Division told ICIJ on the condition of anonymity. “It was just an instance of CYA,” the agent said of LB&I’s referral, using the acronym for “cover your ass.”

In statements to ICIJ, the agency defended LB&I, emphasizing that its cases are extremely complex and said that “there are major differences between a large international corporation and any other for-profit enterprise.”

“The accounting profession operates under a professional code of conduct as well as under the purview of oversight review boards outside of the IRS related to the preparation of certified audited financial statements,” IRS spokesperson Robyn Walker told ICIJ in a written statement. “These internal controls and checks and balances generally limit the opportunity for criminal activity. Instead, noncompliance for this population often presents itself in the form of disputes between the IRS and the taxpayers as to whether a taxpayer’s position is consistent with laws and regulations.”

A key part of the IRS’s mission is to enforce U.S. tax laws. Tax crime investigations and prosecutions allow the agency to show that cheating carries consequences — and thus persuade taxpayers to voluntarily comply with the law.

ICIJ reviewed data showing small numbers of cases that LB&I flags as potential crimes to investigate. Last year, the office flagged just seven instances of possible crimes to investigate further — the most since 2017, when it flagged eight.

Those are ridiculous numbers … In my experience, it’s an ingrained culture where they don’t like to serve summonses.

— former IRS agent Don Fort

That’s seven cases of possible crimes among all of the large corporations and ultrawealthy people that the office oversees. Last year, Fortune 500 companies brought in $18 trillion in combined revenue, and trillions of dollars more flowed through the investment partnerships favored by the ultrawealthy.

The low number of referrals from LB&I has left investigators in the agency’s criminal division frustrated.

“Those are ridiculous numbers,” Don Fort, a longtime IRS agent who led the Criminal Investigation Division before leaving in 2020, told ICIJ of LB&I’s referrals. “In my experience, it’s an ingrained culture where they don’t like to serve summonses, they don’t like to do fraud referrals.”

The sources of investigations opened by the IRS’s criminal investigators between 2014 and 2020 illustrate the small role LB&I plays in the agency’s criminal cases. During that period, according to the referrals data reviewed by ICIJ, LB&I sent criminal investigators no more than 40 fraud referrals. In comparison, according to a separate dataset, the IRS opened roughly 260 times as many criminal investigations from information it received from federal agencies outside the IRS, including federal prosecutors. The agency opened nine times as many criminal investigations from reading news stories.

ICIJ acquired this additional data regarding the sources of criminal investigations from Robert Warren, a former IRS agent and assistant professor of accounting at Radford University in Virginia. Warren says that over the past 13 years, IRS criminal investigators have spent only a fraction of their time pursuing cases primarily related to tax crimes. Instead the investigators frequently chase cases such as drug crimes, cryptocurrency schemes and money laundering. Warren says this is a distraction from the agency’s core mission. Many IRS criminal investigators are uninterested in chasing tax crimes due to a perceived reluctance of prosecutors to issue indictments and the generally light punishments that tax convictions often fetch, he says.

“If they can put in the same amount of work on a case that gets a higher rate of return, they’re going to go with the higher rate of return,” Warren told ICIJ.

In 2020, then-IRS Commissioner Charles Rettig oversaw the establishment of the Office of Fraud Enforcement, which helps the civil divisions develop tax fraud cases. Rettig told ICIJ that when he arrived at the agency, he was shocked to discover only 7% of the IRS’s criminal investigations had come from the civil divisions, which include LB&I. “To me, the civil side isn’t doing their job if they’re out there and” can’t detect possible tax crimes, Rettig said.

Olson, the former IRS taxpayer advocate, expressed concern about where the fraud enforcement office fell in the IRS’s organizational chart: within the Small Business and Self-Employed Division. She worries that this may send the message that the IRS is more interested in finding crimes among less powerful taxpayers. “It should be a separate operational unit,” Olson told ICIJ.

Damon Rowe, a career IRS criminal investigator who ran the fraud enforcement office until retiring from the agency in 2022, disagreed, saying the office’s place did not bias it in favor of any one division.

Rowe told ICIJ that while the office saw plenty of potential criminal cases coming from the small business division, he sensed a cultural aversion within LB&I to flagging possible crimes among corporations and the ultrawealthy. His inability to meaningfully lift LB&I’s criminal referral numbers remains a major regret from his time running the fraud enforcement office, he says.

“I get that these cases are hard, but that doesn’t mean that they shouldn’t try,” Rowe said. “If LB&I believes there’s an infraction, they’re more willing to work it out with the taxpayer rather than call over a fraud enforcement agent to take a look.”

The Treasury Department’s Inspector General for Tax Administration has apparently taken notice of LB&I’s differing approach. The watchdog opened an investigation in 2022 to determine whether the division gives large corporations preferential treatment, according to sources familiar with the inquiry.

In an email, the inspector general told ICIJ that the inquiry is ongoing and that its report on the matter should be released by the end of this fiscal year. The office did not elaborate further.

The IRS’s “revolving door”

Officials interviewed for this story pointed to numerous contributors to LB&I’s comparatively light approach, and not everyone agreed on the causes. In addition to the division having to follow more cumbersome rules, current and former agents cited a culture of acquiescence after being beaten down for years by wealthy taxpayers and their high-priced accountants and lawyers. The representatives of these people and corporations often seek to gain an advantage by accusing IRS agents of breaking protocols or laws, and have enlisted lawmakers to attack the agency’s enforcement actions.

One current LB&I agent, however, disagreed that culture plays any role, saying his managers supported him taking a firm stance toward big taxpayers. The agent, who spoke on the condition of anonymity, said it was insufficient resources — not timidity — that caused the office to shy away from taking a hard line on egregious tax dodging. He described a case in recent years in which an LB&I manager declined to advance any criminal investigation involving a major tax dodge by a wealthy individual. The agent described the case as a “dead bang” — in terms of easily proving criminal intent.

“It pissed me off,” the agent said of his office declining to refer the case to criminal investigators. “It was because we didn’t have enough people to chase it.”

Every current and former IRS official interviewed for this story said leadership is key in setting the tone for how LB&I approaches the most powerful taxpayers. Some agents expressed concerns about the seeming friendliness and familiarity of LB&I managers with the representatives of taxpayers under audit.

It undermines trust in government and our tax system when IRS employees go back and forth between government service and lucrative jobs with big accounting firms and other giant corporations

— Senator Elizabeth Warren

Some agents, as well as legislators and watchdog groups, singled out the prevalence of high-ranking officials at the IRS who previously worked for the major accounting and law firms that go head-to-head with LB&I every day. A closely related concern is the prevalence of former IRS agents and managers who went on to represent rich people and large corporations. In many cases, these former IRS agents and executives bring the arguments of wealthy taxpayers directly to IRS officials they know well as friends and former colleagues.

Last August, the IRS’s watchdog, the Treasury’s Inspector General for Tax Administration, released a report warning that the movement of employees between the IRS and accounting firms and big companies raises “impartiality concerns.” The report identified no direct correlation between the employees’ work assignments and the companies they came from or left the agency for. But it found that nearly 500 employees in LB&I, the Office of Chief Counsel and the appeals office had received income from a major accounting firm or large corporation before or after their time at the IRS. Some executives also received retirement income from a large accounting firm during their time at the IRS and properly reported it in their financial disclosure forms, the report said.

“It undermines trust in government and our tax system when IRS employees go back and forth between government service and lucrative jobs with big accounting firms and other giant corporations,” Senator Elizabeth Warren, a Democrat from Massachusetts, told ICIJ in a statement. “We need stronger ethics rules across the board for government officials and to close the revolving door.”

The IRS finds itself in a difficult position in this regard. Experts agree that with its new funding from Congress, the agency must attract top talent from major accounting and law firms who earn far more than the agency can pay.

An ICIJ review shows that top executives in LB&I commonly switch hats from regulating the wealthiest taxpayers to working for them.

A review of LB&I executive lists covering the past 13 years shows that out of 114 top executives named, at least a quarter either had worked for a major accounting firm, a tax consulting firm or a major tax law firm shortly prior to joining the IRS or left the IRS for such private sector roles.

In a statement to ICIJ, the IRS said it needed private sector talent and that safeguards are in place to prevent conflicts of interest.

“The tax law is complex, and the IRS needs insight from those in the tax community to help the agency tackle complex issues and share valuable insights that can complement the work of career government employees,” IRS spokesperson Robyn Walker told ICIJ in a statement. “People from the private sector provide important viewpoints and unique expertise needed to help the IRS run the tax system. This takes on even more importance as the agency works to build compliance work in high-risk corporate and high-wealth areas.”

“Given the intricacies and evolving nature of the nation’s tax code and the economy, it’s impractical to assume only current IRS in-house employees can be executives,” the statement added.

The agency also said it has a “strong system of checks and balances in place to ensure fairness in its compliance activities,” including a review process to make sure that decisions are shielded from outside influences.

The IRS’s current chief counsel, Margie Rollinson, has gone through the revolving door twice. In 2013, after more than two decades at EY, the Big Four accounting firm formerly known as Ernst & Young, Rollinson took a senior post at the IRS chief counsel office, overseeing more than 60 attorneys. She returned to EY in 2019 and then recently rejoined the IRS after the Senate confirmed her nomination for the chief counsel job at the end of February. During her first stint at EY, Rollinson advised Hewlett-Packard Co. on a major offshore tax scheme, according to records obtained in a Senate investigation into the technology firm’s tax avoidance efforts. The Senate Permanent Subcommittee on Investigations found that, with EY’s apparent support, Hewlett-Packard used a loophole to avoid paying taxes on billions of dollars in income. “We believe it’s egregious,’’ then-Subcommittee Chairman Carl Levin, D-Mich., said at the time about the offshore tax maneuvers.

The agency noted that during the senate confirmation process Rollinson pledged to recuse herself from matters involving her past clients in her first four years at the IRS. She also committed to a four-year buffer after leaving the agency during which she will avoid working for firms whose clients she dealt with at the agency.

The IRS Independent Office of Appeals, tasked with impartially deciding taxpayers’ challenges to IRS findings, is headed by Elizabeth Askey, a former principal at PwC, another Big Four firm. The appeals office can have extensive influence over how much a company will ultimately owe the IRS and is known to frequently slash the tax bills of multinational corporations challenging audit results. A 2016 article that Askey co-authored while at PwC argued that LB&I was too aggressive with wealthy taxpayers and large corporations. Askey and her co-authors criticized LB&I for using the term “campaign” in publicizing its enforcement priorities, arguing that it “suggests a military style assault on perceived tax noncompliance.”

The IRS said that Askey has a strong record in “fairly serving the interests of both taxpayers and tax administration.” It noted that the agency’s taxpayer advocate recently recommended that the appeals office hire more employees from the private sector to ensure fairness and impartiality. “External hires help Appeals maintain an arms-length relationship with the rest of the IRS,” the agency told ICIJ.

Fulfilling a commitment

Michael Welu is proud of his more than three decades at the IRS. He sports a custom golden ring with the agency’s logo that he had a jeweler make after his retirement nearly two years ago. The walls of his home office are lined with his awards and recognitions from the agency, and he drinks from a coffee mug emblazoned with the emblem of IRS Criminal Investigation, one of the offices he worked closely with.

He says he is speaking out publicly for the first time because he wants the agency to do better in its pledge to stand up to the county’s most powerful taxpayers. Even with the agency’s new billions, he says, it will need a significant culture change to fulfill this commitment. Welu says that solutions can be as simple as teaching agents from an early stage that as long as they follow all protocols, they should not be afraid to take a firm stance with an uncooperative wealthy taxpayer. He believes the agency must pursue the firms that formulate and sell tax evasion schemes to major taxpayers.

Welu also thinks that procedures for information gathering should be streamlined and made more equal across offices. To get serious about going after high-end tax cheats, he says, the agency will have to train its managers to be unafraid of conflict with big taxpayers who don’t cooperate. To do this, they’ll need support from the very top ranks, including the IRS commissioner and the Office of Chief Counsel.

“These are difficult cases,” Welu said, “but they can be done.”

Contributors: Denise Ajiri, Jelena Cosic and Delphine Reuter

A pair of U.S. Internal Revenue Service agents are attempting to interview a billionaire they suspect of cheating on his taxes. But across the table from the agents is a formidable entourage of esteemed tax professionals hired to defend the billionaire. They include white-shoe attorneys — each of whom knows more about their own arcane corner of tax law than just about anyone on earth — along with highly specialized accountants and economists.

Neither of the two IRS agents has a law degree. Complex arguments from the billionaire’s entourage fly over their heads. The IRS agents are outmatched by a team whose combined years of experience in tax law and accounting exceed their own by over a century.

This stark example, laid out by former IRS officials in interviews with the International Consortium of Investigative Journalists, isn’t a hypothetical so much as a glimpse into the agency’s regular challenges in auditing the United States’ highest earners. These battles often come down to experience and expertise. The IRS has been losing, former officials said.

“The really experienced people tend to be on the outside [of the IRS],” Charles Rettig, who ran the IRS under former president Donald Trump and left the agency in 2022, told ICIJ. “That’s a major hurdle.”

A historic push is now underway to change this dynamic. In mid-2022, the Inflation Reduction Act delivered the IRS a historic $80 billion — in part, to bulk up the agency’s divisions that audit millionaires, billionaires and large corporations. After years of pitiful enforcement rates against wealthy taxpayers, the agency is embarking on an unprecedented push to step up its capabilities and hone its ability to take on the ultra-rich.

Hundreds of billions could be at stake. The Treasury Department, the IRS’s parent agency, has estimated that wealthy people do an outsized share of tax dodging. As of 2019, the top 1% of Americans are responsible for 28% of the “tax gap” — defined as the difference between taxes that are owed and collected. This number added up to an estimated $163 billion annually. In early February, the Treasury Department announced that if the increased funding levels remained intact, the IRS could collect more than a half-trillion dollars in additional unpaid taxes over the next decade.

ICIJ investigations, including the Panama Papers and Paradise Papers, revealed the complex maneuvers wealthy people and corporations use to evade or avoid taxes. Over several years of reporting, ProPublica exposed how chronic underfunding had put the IRS at a dire disadvantage, sometimes falling badly behind in complex global tax cases because it could not retain the necessary expertise to match its counterparts in the private sector.

For nearly two years, House Republicans have made it a priority to claw back the IRS’s new money, chipping away more than a quarter of the $80 billion. They have argued that an empowered tax agency will impinge on Americans’ liberties and have claimed, dubiously, that it will increase audits of working-class people. The IRS now finds itself in the difficult position of defending a mission that, due to its complexity and scale, could take years to yield its full impact.

Still, the agency has touted a few early wins spurred by the infusion of funds. It said it opened 1,600 new cases involving millionaires and billionaires last year and has already recouped several hundred million dollars in previously unpaid taxes as a result. This includes $15 million from one individual who claimed huge business deductions on the construction of their 51,000-square-foot mansion, including its pool, pool house, tennis and bocce ball courts, as well as luxury cars, country club memberships and homes for their children.

ICIJ spoke with more than a dozen current and former federal tax officials, as well as experts in the field, who painted a picture of an agency at a pivotal moment as it tries to modernize while coming under frequent political attacks. Equalling the might of the billionaire entourage is a goal that many agree is years away. Now may be its only chance to lay the groundwork.

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Strength in expansion

Last September the IRS announced it would hire 3,700 new agents to help increase scrutiny of taxes paid by corporations, wealthy people and the private investment funds they increasingly favor. It’s an ambitious goal, as the agency must compete with corporate law firms and accountancies that offer tax professionals some of the best salaries on earth.

“These are the most sticky and cloudy and hard-to-explain areas of tax law,” Kim Clausing, a former Treasury Department official, who is now a professor of tax law and policy at the UCLA School of Law, told ICIJ. “Finding people who know it really well and are willing to work for less than a half-million dollars a year is really difficult.”

Even with its new billions, the IRS must navigate federal rules that can limit how much federal employees can earn.

To maximize its new talent, former IRS officials said that the agency is attempting to be more strategic with how it deploys its most experienced employees. This includes placing agents with experience in crafting criminal cases into the agency’s sprawling civil divisions in order to better identify the small portion of egregious tax cheating cases that could be criminally prosecuted, according to former officials.

The agency is also pairing senior-level agents with newer hires and getting government attorneys involved at earlier stages of investigations.

“It’s a similar model to what you have in the big accounting firms and law firms where you form teams with senior-level people who work with people at the initial stage of their careers,” Rettig said.

The partnership challenge

Much of the IRS’s hiring for its high wealth division aims to bolster the agency’s ability to take on the rapidly growing phenomenon of “complex partnerships” — the amorphous webs of limited liability companies, trusts and other entities that can obscure movements of money. The number of these private investment structures has expanded by more than 600% over the past two decades. They are also ubiquitous in the private equity funds and hedge funds increasingly favored by the 1%.

“A wealthy person is often surrounded by partnerships,” Steven T. Miller, a former IRS commissioner who is now a partner at a tax law firm that represents wealthy people and businesses, told ICIJ. “Partnerships have been killing the IRS for years.”

Those partnerships can consist of thousands of so-called “pass-through” entities, like LLCs and trusts, that crisscross secretive tax havens and connect to numerous investors. The pass-through entities themselves are generally not taxed, distributing responsibility for the tax payments between multiple individual investors in the partnership. They can also present an agent with mind-boggling complexity made worse by the fact that the IRS often sees only shadows of these partnership structures in the routine filings the agency receives. To see the whole structure, the agency has to request the information from the partnership itself, according to former officials.

The question of how to even define a large partnership has challenged the agency for years. Government Accountability Office reports from 2014 through last year criticize the IRS for not properly spelling out the term, which the watchdog defines as partnerships with more than $100 million in assets and 100 or more total partners.

Experts say authorities could leverage computing power to help map out complex partnerships and detect cheating. The IRS teams tasked with analyzing this data have been badly understaffed for years, according to Richard Prisinzano, who worked as an economist for the Treasury Department until 2017. “We would ask for reports on partnerships, but there were only three or four people in the data unit of IRS high wealth,” Prisinzano said. “They’d say, ‘We just don’t have the resources to do this.’”

Last year, the IRS announced it was expanding an artificial intelligence pilot program that agents would use to audit the 75 largest partnerships in the country. But even if advanced computing could crack a partnership structure, building a strong case against a partnership is an entirely different challenge.

While experts representing the wealthy may construct tax schemes of deep complexity, Rettig says they are good at doing so within the letter of the law. “Almost every high-wealth return has numerous professionals involved before it gets filed,” he said. “I don’t see the government hitting home run after home run in these cases.”

Several experts and former officials said that partnership audits have been so remarkably rare that the accountants who create the structures may have lost sight of what exactly is acceptable from a legal standpoint. Others noted that a massive partnership can confuse even its own accountants.

Almost every high-wealth return has numerous professionals involved before it gets filed. I don’t see the government hitting home run after home run in these cases. — former IRS commissioner Charles Rettig

Curtis Elliot, a tax attorney who represents wealthy taxpayers in disputes with the IRS, says that partnerships can become so complex that the tax preparer fails to see everything happening inside the partnership, including intricate transactions involving debt financing. “It can go over an accountant’s head,” Elliot told ICIJ, “even at a very well-heeled CPA [Certified Public Accountant] firm.”

Working cryptocurrency cases

The IRS is also using its new money to pursue modes of tax cheating outside partnerships. Several former IRS officials pointed to cryptocurrency as an area of low-hanging fruit. Investors in digital currency often see themselves as operating outside traditional frameworks of finance and taxation. But U.S. law generally treats cryptocurrency investments the same as any other type of asset — when you cash out, you need to pay tax on any gains. Former IRS officials say, though, that not all cryptocurrency investors support this notion.

“The IRS is looking deeply into virtual currencies,” said Kathy Enstrom, a former executive director of field operations at the IRS’s Criminal Investigation division who now works for a law firm specializing in tax matters. “Most agents you’ll talk to over there have at least one case involving crypto.”

Under the Obama administration, the IRS began obtaining reams of customer information from cryptocurrency exchanges. The agents found that many customers, even of mainstream exchanges, were not reporting their activity to the tax agency, according to former IRS officials.

Rettig views this as one of the most promising areas of enforcement for the IRS’s high-wealth team. “Funding enforcement in the virtual currency space would certainly get you a return of 10 or 11 to one, or more,” he told ICIJ. “The rate of noncompliance in that space by some estimates is 75%.”

IRS agents within the IRS’s Criminal Investigation division have played key, if sometimes underappreciated, roles in the country’s largest cases involving cryptocurrency. In 2022, agents from the IRS’s cybercrimes unit were instrumental in cracking a case that led to the seizing of $3.6 billion in stolen cryptocurrency from a couple living in Lower Manhattan. This was the U.S. government’s largest-ever seizure of stolen funds. Before that, IRS criminal investigators contributed key breakthroughs in the hunt to find Ross Ulbricht, the founder of the dark-web cryptocurrency-based black market Silk Road, although the FBI enjoyed most of the glory for Ulbricht’s blockbuster arrest.

“They’re fully invested in this,” Enstrom said of the IRS’s focus on cryptocurrency. “They’re getting better and better at working these cases.”

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The problems with prosecutions

Some of the IRS’s cases involving the ultra-rich will likely evolve into criminal prosecutions. However, the IRS does not have the power to prosecute criminal cases on its own. Instead, it must send a case to federal prosecutors — and hope they will run with it.

Building a criminal tax case requires special expertise both inside the IRS and in prosecutors’ offices, former officials said. Federal prosecutions of wealthy tax cheats have declined significantly in recent years. Experts say the IRS’s underfunding has been at the center of this problem. But former tax officials say they fear a compounding issue: prosecutors’ offices in many districts around the country may be too understaffed or inexperienced in financial matters to even take on the cases that the IRS sends them.

“Enforcement has been so low for so long, there are very few people in the IRS or Justice Department who have the relevant experience to actually go to trial in criminal tax cases,” Rod Rosenstein, who served as the U.S. Deputy Attorney General under President Trump after overseeing the Justice Department’s Tax Division, told ICIJ.

Rettig said that outside a few districts in major cities such as New York and Los Angeles, federal prosecutors are often reluctant to take referrals from the IRS. As commissioner, he tried to convince prosecutors in districts around the country to take more tax cases, he said, offering prosecutors significant help from Justice Department lawyers in Washington, D.C.

“I would say: ‘We’re handing you a prosecution on a silver platter — you’re going to get a plea,’” Rettig said. “But if it’s not cartel-level stuff, if it’s not going to make the newspaper, they’re not as interested.” Rettig attributes this reluctance to understaffing.

Enforcement has been so low for so long, there are very few people in the IRS or Justice Department who have the relevant experience to actually go to trial in criminal tax cases. — former U.S. deputy attorney general Rod Rosenstein

Enstrom says she had similar struggles with federal prosecutors while helping to oversee the IRS’s criminal division. “Most of the time they did not have financial-crime-minded AUSAs [Assistant United States Attorneys] to take on these more complex financial cases.”

A bottleneck of tax cases could further delay the federal government getting the full return on its new investment in the IRS.

Supporters of the agency’s new funding say it’s crucial to be realistic about the timeline for change. Rettig says a single partnership tax case, for instance, can take a decade to conclude.

Jean Ross, a senior fellow at the Center for American Progress, a liberal think tank, says that politicians must take a long-term view of the agency’s transformation.

“We’re talking about a massive systems change and a culture change at the IRS,” she said. She noted that Republican attacks on the agency’s funding are unlikely to subside. “It’s going to be a fight every time.”