Former IRS acting Commissioner Douglas O’Donnell warned that cuts made under the Department of Government Efficiency (DOGE) could weaken the agency’s enforcement, taxpayer services and modernization efforts in the years ahead.

O’Donnell said the effects of the workforce reductions are more likely to become visible over time as the IRS operates with a smaller budget, Fortune reported Monday.

"I’ve been very concerned with the ability of the agency to carry out on its mission, whether it’s at the services level or enforcement level, but also just in general to be a functioning federal government agency going forward," O’Donnell told Fortune.

The comments come after DOGE cut more than a quarter of the IRS workforce from a base of about 100,000 employees. The IRS received 140.2 million individual returns and processed 138.6 million, while issuing more than 90.4 million refunds during the 2026 tax season.

IRS Faces Modernization Challenges

O’Donnell, who served as acting IRS commissioner twice, said the agency’s problems did not begin with DOGE. He pointed to years of underinvestment in modernization, including the long-running effort to reduce paper-based processing.

Paper returns account for about 6% of all returns but 72% of processing costs, according to a Treasury Inspector General for Tax Administration. The IRS plans to reduce paper-processing costs from $450 million to less than $20 million by 2029, according to the report.

"It was clear that there had been underinvestment for a number of years across multiple administrations," O’Donnell said. "So it’s not pointing any fingers here."

The Inflation Reduction Act originally provided the IRS with about $80 billion in additional funding for modernization, enforcement, taxpayer services and operations, though much of that funding was later rescinded.

The IRS has also been pushing modernization through technology, including efforts to improve fraud detection and digital taxpayer services, while reorganizing agency operations under CEO Frank Bisignano.

DOGE formally reached the July 4, 2026 sunset date established by President Donald Trump’s executive order. The initiative had been created to identify and eliminate waste, fraud and abuse across the federal government.

Enforcement Faces Staffing Pressure

Earlier government data showed IRS enforcement revenue fell 5%, or nearly $5 billion, in fiscal 2025, while the agency opened more than 120,000 fewer audits. IRS enforcement lost roughly 5,000 employees heading into 2026.

O’Donnell said fewer workers could eventually limit how broadly the agency can examine taxpayers and companies.

"In the large corporate space, just over time, losing employees, you just basically reduce what you can get to, and you cover less of it," he said. "Over time, that diminishes the ability of leaders in the IRS to have confidence that taxpayers are complying because you’re not getting to a large enough number of them to be sure about that."

IRS Defends Tax Season Performance

The IRS said the agency’s 2026 filing season was successful despite the staffing reductions.

"Contrary to claims from critics, the IRS delivered a historic, successful 2026 filing season efficiently processing returns and issuing average refunds that were 11 percent higher than last year as Americans benefited from the President’s Working Families Tax Cuts," an agency spokesperson told Fortune. "IRS Chief Executive Officer Frank Bisignano remains committed to maintaining the right workforce to deliver the world-class service American taxpayers deserve."

IRS chief Frank Bisignano also said the agency had cut $2 billion from its information technology budget by renegotiating, scaling back or eliminating contracts without operational disruptions.

The IRS’s discretionary budget fell from $12.2 billion in fiscal 2025 to $11.2 billion in fiscal 2026 and is projected to drop to $9.8 billion in fiscal 2027. Fortune reported that the reductions could affect enforcement operations and the Direct File program.

O’Donnell said the agency also needs to keep investing in technology and AI.

"If the objective of the IRS is to be able to improve service to taxpayers, 24/7, 365, you’re going to need to have systems availability to do that, and in order to have the systems, you have to build them, and then you have to maintain them," he told Fortune.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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