Coffee Break with Neal – May 8, 2026 · The Tax Strategy Network

Coffee Break with Neal – May 8, 2026

How IRS enforcement is quietly shifting from people to machines

Today’s Coffee Break dug into what’s actually happening inside the IRS right now, why everything that needs a human is grinding to a halt, and at the same time why automated enforcement is ramping up.

The IRS has been gutted (on purpose)

Since early 2025, IRS headcount has dropped from roughly 100,000–102,000 employees down to about 74,000 by the end of 2025, around a 27% reduction according to Yale’s Budget Lab.
There have been multiple leadership changes, including the unofficial “CEO” Bisignano, who functions like a commissioner but without actual Senate confirmation.
Morale inside the IRS is reportedly terrible, and anything that requires a human touching your file is painfully slow.
GAO reported about 2 million “open files” in the system at the end of 2025, and we’re seeing that in real life at Tax Sherpa with items sent in late 2024/2025 that still haven’t been processed.

Customer service is so backlogged that the IRS temporarily reassigned about 1,500 IT and HR staff to phone and taxpayer service duty after a short training sprint, and now that “temporary” assignment has been extended.

Human audits are collapsing

Headcount is at the lowest level since the 1960s, and there is internal talk of cutting it further to around 50,000.
Audits for high-income individuals, partnerships, and large corporations are down about 31% by mid‑2025.
The Global High Wealth office lost roughly 38% of its staff in the early weeks of Trump’s term, and Criminal Investigation has also been heavily reduced.
Total completed audits are down to about 497,000 a year, under 30% of the prior 1.7 million average, implying roughly a 70% drop in people‑driven audit activity.
Yale Budget Lab projects roughly $600 billion of lost revenue over 10 years from reduced enforcement, which is basically a rounding error at federal budget scale.

So, on the human side, enforcement is much weaker. But that does not mean enforcement overall is weaker.

Machine enforcement is ramping up

This is where Palantir and AI enter the picture.

Since 2018, the IRS has paid Palantir more than $130 million for what they call the “Lead and Case Analytics Platform.”
According to recent GAO reports, IRS AI “use cases” have jumped from 10 (three years ago) to 54 in 2024, and now to 129 use cases.
Bisignano’s written Senate Finance testimony describes IRS AI as using sophisticated analytics to pinpoint non‑compliance and fraud with “increased precision.”

These systems pull together:

Tax return data
Bank records
Health care data
Crypto transaction data
Legacy IRS unstructured data, disclosure docs, and other information that never made it into proper databases

They are effectively replacing the old DIF score rules‑based model with new AI models like:

Large Partnership Compliance model
Line Anomaly Recommender
Individual Taxpayer model
“Agent Force” and other tools designed to surface “investigatable” issues

The problem: There still often isn’t a human on the back end to intelligently resolve the cases those systems generate.

What that looks like in real life: CP notices

You’re going to see this as an increase in automated notices.

Any IRS notice starting with “CP” is computer‑generated (no human touched it).
CP2000 is the common math‑error/mismatch notice, and the IRS sends 9–10 million of these a year.
These get triggered when IRS matches third‑party forms (W‑2s, 1099s, 1098s, etc.) to your tax return and the return shows less income than what was reported by third parties.

Two real‑world patterns we see:

Legitimate errors: Clients forget a 1099 or an IRA distribution, and the CP2000 correctly catches missing income.
Bad data or missing context:

All of this comes back to one core question:“$100 hits a bank account — what is it?” Income? Gift? Reimbursement? Loan repayment? Something else? The tax character depends entirely on facts and circumstances, and an AI looking at bank feeds and forms will not reliably know that.

Backlogs and the new Document Upload Tool

There is a newer Document Upload Tool on IRS.gov (DUT code printed on the notice) that lets you upload responses instead of mailing/faxing.
It works inconsistently in practice, and even when uploads succeed, you still land in the same human review backlog.

So we’re in a weird hybrid world:

Front end: More automated selection, matching, and notice generation.
Back end: Fewer humans to read, understand, and resolve your responses.

Aggressive strategies under AI scrutiny: conservation easements

We also touched on syndicated conservation easements, which are a good example of legitimate code sections being abused and then hammered by enforcement.

A conservation easement is a restriction placed on land so it can’t be developed, which legitimately reduces market value and can create a real charitable deduction.
There has been a big industry of syndicated deals promising very large deductions to investors by putting land into easement.
IRS and Tax Court have found many of these deals to be wildly overvalued or outright fraudulent, and courts are often slashing claimed values down to about 6% of what was originally claimed.
That means people thought they were getting, say, a $100M deduction, but after IRS and the courts, they only get about $6M, and they already paid substantial fees to promoters.
IRS has a strong winning track record in court on these cases and is expected to keep pursuing them, now with AI‑powered systems helping flag them.

Even if your easement is legitimate, the abuse in the space means you are very likely to get pulled into scrutiny.

What should taxpayers actually do?

Minimize unnecessary interactions with the IRS.The best defense is a well‑planned, clean situation that doesn’t generate issues in the first place.
Understand the difference between filing and planning.
Plan around business ownership.
Be very careful with “too good to be true” strategies.If an investment is marketed primarily as a massive tax write‑off instead of a real economic deal, assume it will be on the radar of IRS human and AI enforcement.
If you get a notice, don’t panic.

Tax law still allows you to organize your affairs to pay the least tax permitted by law; in fact, courts have explicitly recognized that you are not required to pay more tax than legally owed. The real work now is making sure that, in a world of AI‑driven enforcement and under‑staffed human review, your situation is structured so that any IRS interaction is rare, well‑documented, and defensible.

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