How Gutting the IRS and Killing Direct File May Cost Taxpayers Far More Than It Saves

January 2026 | Tax Policy Analysis, Jessica I. Marschall, CPA, President MAS LLC

In less than one year, the Trump administration has eliminated 25% of the IRS workforce (over 25,000 employees) while simultaneously canceling Direct File, a free tax-filing program that saved taxpayers money and earned a 98% satisfaction rating. The stated goal was efficiency and cost savings. The likely result: up to $2.4 trillion in lost federal revenue over the next decade, a windfall for tax cheats and the commercial tax-preparation industry, and significantly degraded service for honest taxpayers.

Most established CPA firms have not been able to take in new clients, especially individuals, for a number of years. We have only taken referral clients for the past almost decade. We would absolutely love it if taxpayers had a reliable resource for filing simple 1040 returns. Read on to hear about how this need was identified, funded, and then scrapped. And read on about how firms like ours who specialize in serving middle income taxpayers and small business owners are already anticipating the potentially worst tax season in our 26 years in the industry.

This may also suggest why so many CPAs are retiring, cutting back, and/or refusing to take in new 1040 clients. We are committed to continuing to serve our 400 or so tax clients, but want to ensure we candidly share what has happened at the IRS and how this may affect the upcoming tax filing season.

The Numbers That Tell the Story

IRS Workforce Decimation

According to the Treasury Inspector General for Tax Administration (TIGTA), from January through May 2025, the IRS lost 25,386 employees—representing a full quarter of the agency’s workforce. The reductions came through a combination of the Deferred Resignation Program (DRP), Voluntary Early Retirement Authority (VERA), Voluntary Separation Incentive Payments (VSIP), and outright layoffs. The workforce shrank from approximately 103,000 to 77,428 employees.

But the damage was not evenly distributed. The employees responsible for collecting taxes from wealthy individuals and corporations were hit hardest. Revenue agents (the auditors who examine complex returns) lost 31% of their ranks (3,623 agents). The Small Business/Self-Employed division lost 35% of its staff. The Global High Wealth unit, which focuses on the ultra-rich, lost 38%.

Inflation Reduction Act Funding: From $80 Billion to Rubble

In 2022, the Inflation Reduction Act provided the IRS with $80 billion in supplemental funding over ten years, which represented one of the first meaningful investment in the agency in decades. The money was designated for enforcement ($46 billion), operations support ($25 billion), IT modernization ($5 billion), and taxpayer services ($3 billion). Congressional Republicans immediately targeted this funding for clawback. As a practitioner, these funds were immediately evident in IRS professionals who were able to finally resolve some of our client’s outstanding issues. We had online meetings scheduled, letters answered and started to make some good progress on clients with ongoing issues.

It should also be of note that our practice of around 400 clients serves middle income taxpayers and small businesses. Our client base was greatly aided by the additional personnel at the IRS willing to help resolve our issues. Over our 26 years in the tax industry I have determined that the majority of IRS personnel are really there to help. Once a person can be reached and we are no longer relying upon just the electronic filing system, I have seen significant assistance and the majority of penalties waived. (Interest cannot be waived but first-time abatement penalties can in many cases.)

As of March 2025, according to TIGTA, the IRS has only $37.6 billion remaining. The Fiscal Responsibility Act of 2023 rescinded $1.4 billion; subsequent continuing resolutions clawed back $20.2 billion in FY2024 and another $20.2 billion in FY2025. Of the $45.6 billion originally designated for enforcement, virtually all has been eliminated. Only $300 million remains in the enforcement account as of mid-2025, with just $3.5 billion actually spent on its intended purpose.

Direct File: Killed Before It Could Scale

In November 2025, the IRS officially suspended Direct File, the free online tax-filing program launched under the Biden administration. During its brief existence, the program earned a 98% satisfaction rating from users and processed 296,531 returns in the 2025 filing season—more than double the 140,803 returns from its 2024 pilot year.

Development Costs: The IRS reported Direct File cost $41 million in tax year 2024, though the agency acknowledged this understates total development costs. Foundational technology and product development costs were $10.5 million, with operational costs of just $2.4 million. At scale, the program would have cost between $64 million and $249 million annually, depending on the number of taxpayers served.

Projected Savings to Taxpayers: Research from the Economic Security Project estimated that at maturity (within five years), Direct File would have saved American taxpayers $11 billion annually in filing fees and time costs, plus an additional $12 billion annually in tax credits that eligible families fail to claim because they don’t file returns. Combined, that’s $23 billion per year that will now flow to commercial tax preparers and remain unclaimed.

The average American spends $150 and 9 hours annually preparing their taxes. Direct File users completed returns in under 30 minutes at no cost. During the 2024 pilot, users claimed $90 million in refunds and saved an estimated $5.6 million in preparation fees.

The Fiscal Impact: Penny Wise, Trillion Dollar Foolish

Lost Revenue Projections

The Yale Budget Lab has published the most comprehensive analysis of what IRS cuts mean for federal revenue. Their findings are stark:

Baseline Scenario: If IRS staffing is cut by 50% (approximately 50,000 employees), the federal government will lose $395 billion in revenue over the ten-year budget window ($350 billion net after accounting for reduced costs).

Moderate Noncompliance Scenario: With an 18% staff cut and increased taxpayer noncompliance, revenues could fall by $1.6 trillion over a decade.

Severe Scenario: If cuts reach 50% and noncompliance substantially increases, revenues could decline by $2.4 trillion.

The Yale Budget Lab also estimates that the original $80 billion IRA investment would have generated $637 billion in net additional revenue—an 8:1 return on investment. That opportunity has now been largely forfeited.

The Mathematics of Enforcement

IRS enforcement is not an expense. Rather, it is a revenue generator. A 2023 Treasury Department study found that audits of the top 0.1% of taxpayers returned more than $6 in revenue for every $1 spent. The National Bureau of Economic Research reported that audits of wealthy taxpayers return $12 for every dollar invested. In fiscal year 2023, revenue agents recommended $32 billion in additional tax assessments.

The top 1% of earners are responsible for nearly 30% of unpaid taxes or approximately $205 billion annually, according to Budget Lab calculations. With 31% of revenue agents gone and the Global High Wealth unit down 38%, who will pursue these cases?

The Tax Gap

The “tax gap”—the difference between taxes legally owed and taxes actually collected—stands at approximately $625 billion annually. During the 2010s, when congressional Republicans drove deep budget cuts (roughly 20% after inflation from 2011-2020), audit rates for millionaires fell by more than 70%. The IRS had fewer trained auditors in 2018 than at any time since 1953.

The IRA funding was meant to reverse this trend. Instead, we have returned to the pre-2022 trajectory—and accelerated it.

Who Benefits?

The Tax Preparation Industry

Direct File’s cancellation is a direct gift to commercial tax preparers. Americans spend approximately $14.4 billion annually on tax preparation services. Companies like Intuit (TurboTax) and H&R Block have spent millions lobbying against free government filing options.

In 2022, Intuit settled with 30 states for $141 million over allegations it “unfairly charged” low-income taxpayers for supposedly free services. In 2024, the FTC found that TurboTax “deceived consumers” with ads for free products many were ineligible for. The existing Free File program—the industry-run “alternative” to Direct File—has achieved only 3% participation among eligible taxpayers after 24 years.

TurboTax’s Brick-and-Mortar Gambit: Stores That Are NOT Tax Prep Centers

With Direct File eliminated and the IRS weakened, Intuit is doubling down on its physical presence. In November 2025, the company announced it would open 20 brick-and-mortar TurboTax stores in major U.S. cities, plus expand its “TurboTax Expert Offices” from 400 to 600 locations nationwide.

But here’s the critical distinction that consumers may miss: these stores are explicitly not tax preparation centers. According to Intuit’s own general manager, Mark Notarainni, the new retail locations “are not meant to be tax prep centers like H&R Block, nor are they meant to be something akin to a local CPA firm.” Instead, he compared them to Apple stores—places for “guided service and support.”

Walk-ins will be greeted by “concierges”—customer service staff who help people set up their TurboTax accounts or log in. From there, customers meet with an Intuit “tax pro” to discuss their situation, but the experience is designed to funnel them into the TurboTax app on their phones. The stores function as physical on-ramps to Intuit’s software ecosystem, not as professional tax preparation offices.

This distinction matters enormously. In most states, tax preparers are not required to pass competency tests or obtain special training. A “non-credentialed tax preparer,” as the industry calls them, has no formal educational or credential requirements. While Intuit claims its stores will be staffed by licensed CPAs or Enrolled Agents (EAs), the line between “support” and “preparation” in these hybrid environments remains deliberately blurred.

The People Doing the Work: Industry Compensation

The tax preparation industry’s profits don’t flow to the workers on the front lines. At H&R Block, the average tax preparer earns approximately $19.11 per hour according to Indeed, with many employees reporting hourly rates as low as $15-16. One employee noted: “The hourly pay has not kept up with the times. You could make more an hour working fast food.” Another described the salary as “abysmal. I was ashamed of it.”

ZipRecruiter data shows TurboTax-related jobs averaging $16.57 per hour, with a range as low as $7.21 per hour. While Glassdoor reports higher averages for TurboTax Live Experts ($29-40/hour), a telling complaint on the platform reads: “I have been approached by the company for a Select Time Expert role at $31/hour, which I believe is low for a CPA with Tax experience.”

H&R Block employee reviews paint a stark picture of working conditions: “No breaks, no healthcare, no lunch breaks.” “Pay was bad. Long hours, demanding supervisors.” “You are paid a low hourly rate during tax season. This is deducted from your commission at the end of tax season.” “Must be rehired every year—not automatic. Low base wage considering required annual continuing education.”

This is the business model that killed Direct File: seasonal, underpaid workers churning through returns at volume while billions flow to corporate headquarters and shareholders.

What do we see as CPAs? Emergency clients requiring amendments and prior year tax returns including things like depreciating land, deducting full home mortgage interest as a line-item expense on Schedule C. Data entry forms really let you commit tax fraud in a variety of ways.

The Quality Question: Error Rates and Consumer Harm

The commercial tax preparation industry has a documented history of errors and consumer harm. A Government Accountability Office test found that only 2 of 19 tax preparers calculated returns correctly. Other “mystery shopper” tests by consumer groups have found error rates of 25% or higher.

In February 2024, the FTC issued a complaint against H&R Block alleging the company deliberately deleted consumers’ tax data to pressure them into buying more expensive products. According to the FTC, this wasn’t a glitch—it was “an intentional sales tactic” that forced consumers to “choose between overpaying or losing all the information they had already entered.”

Consumer complaints on Trustpilot and the Better Business Bureau tell consistent stories: software bugs causing errors, refusal to honor accuracy guarantees, incorrect advice leading to thousands in penalties and interest, and customer service that ranges from unhelpful to hostile. One complaint describes being told by H&R Block that they purposely told their 2022 advisor not to file an Indiana Amendment—a claim the customer denies. “H&R Block failed a loyal customer and does not care about making things right.”

This is what taxpayers got in exchange for Direct File: an industry that lobbied to kill a free, government-run service that earned a 98% satisfaction rating, so it could continue charging $150 per return through stores that aren’t really tax prep centers, staffed by workers who earn less than fast-food wages, using software with documented accuracy problems.

Wealthy Tax Evaders

With fewer auditors and enforcement dollars, high-income taxpayers and large corporations face dramatically reduced scrutiny. The Large Business and International division (which handles corporations and partnerships with assets exceeding $10 million) lost 19% of its staff. Complex audits take years and require specialized expertise; many of those specialists are now gone.

As one analysis noted, Tesla paid zero federal income tax in 2024 despite billions in profits. With enforcement gutted, such outcomes will become more common.

Impact on Ordinary Taxpayers

The Taxpayer Services division lost 8,604 employees—20% of its staff. During the 2025 filing season, the IRS answered only one-third of the 38.6 million calls it received. The National Taxpayer Advocate warns that wait times will increase significantly, and processing times for credits, refunds, and identity-theft cases will extend.

The irony is bitter: while enforcement against wealthy taxpayers declines, correspondence audits of low-income EITC recipients—conducted by paper notice with minimal staff—may continue or increase. By 2018, EITC recipients earning $20,000 or less were audited at rates comparable to those earning $500,000 or more.

Looking Ahead: The 2026 Filing Season and Beyond

The National Taxpayer Advocate has warned that without improved technology in place, the IRS staffing cuts “could jeopardize the upcoming filing season.” This is particularly concerning given the One Big Beautiful Bill Act (OBBBA), which introduces substantial new provisions (enhanced child tax credits, tip income deductions, charitable contribution changes) that will require IRS administration and taxpayer assistance.

In August 2025, facing these realities, the IRS announced it would cancel planned layoffs and attempt to rehire some separated employees. But rebuilding institutional knowledge takes years. Revenue agents require two years of training to become effective. The agency’s IT systems date to the Kennedy administration. The Individual Master File modernization project, begun in 2009, won’t be complete until fiscal 2028.

Conclusion: A Self-Inflicted Wound

The administration claimed these changes would increase “efficiency and effectiveness.” The evidence suggests the opposite. DOGE claimed $165 billion in savings from government-wide cuts, but the Partnership for Public Service estimates that costs—including paid leave, rehiring errors, lost productivity, and litigation—have already offset most of those gains. Yale’s projections suggest IRS cuts alone could cost $323 billion in lost revenue over a decade, potentially escalating into the trillions.

The IRS collects 96% of all federal revenue. Every dollar cut from enforcement loses more than a dollar in collections. Killing Direct File costs taxpayers $23 billion annually while enriching an industry with a documented history of deceptive practices.

For tax professionals serving clients, particularly clients with complex situations, this means more uncertainty, longer processing times, and a system increasingly unable to provide guidance or resolution. For taxpayers, it means paying more for preparation while receiving less service. For the nation, it means a tax system that works better for those who can afford to game it.

Any good CPA firm would LOVE a Direct File system in place where we could weed out the basic 1040s. As stated above, this is why we have not taken in new clients who are not referrals for almost a decade. We need our brain and team power to tackle more complex tax situations and continue our consulting and advisory practices.

The numbers are clear. The costs are quantifiable. And the beneficiaries are predictable. This is not efficiency—it’s a transfer of resources from the public to private interests, from honest taxpayers to sophisticated evaders, from those who need help to those who can afford to hire it.

Sources

Treasury Inspector General for Tax Administration (TIGTA): Snapshot Report on IRS Workforce Reductions (July 2025)

Yale Budget Lab: The Revenue and Distributional Effects of IRS Funding

Economic Security Project: The Impact of Direct File—By the Numbers (May 2024)

U.S. Treasury Department: Direct File Pilot Results (April 2024)

Government Accountability Office (GAO): IRS Direct File: Actions Needed During Pilot (April 2024)

National Taxpayer Advocate: Annual Report to Congress (2025)

Center on Budget and Policy Priorities: On Tax Day, Reject DOGE-Led Cuts to the IRS (April 2025)

Tax Foundation: IRS Funding Plan: Inflation Reduction Act

Institute on Taxation and Economic Policy (ITEP): IRS Enforcement Boost Was Supposed to Last 10 Years (September 2025)

Accounting Today: Intuit to open 20 brick-and-mortar TurboTax stores (November 2025)

Federal Trade Commission: Complaint Against H&R Block (February 2024)

Indeed, Glassdoor, ZipRecruiter: Tax Preparer Salary Data (2025)