RIP, Tax Division.
The new 2026 fiscal year is upon us – but the impact of the FY2026 budget on tax enforcement is still unknown. The FY26 budget introduces two seismic changes: the complete elimination of DOJ’s Tax Division and significant cutbacks in IRS enforcement funding. These changes signal a potential weakening of the federal government’s ability to ensure compliance with the Internal Revenue Code. For my clients, the implications are far-reaching.
The DOJ Budget: Dismantling the Tax Division
The proposed budget for the Department of Justice’s FY 2026 allocates $0 to the Tax Division, effectively eliminating it. The Tax Division reduced its full time employees by over 30% in FY 2024 and FY 2025 through the deferred resignation program, firing Honors and probationary attorneys, and early retirements. Now, DOJ has announced that in FY 2026, it will move the remaining Tax Division attorneys and support staff to the Criminal and Civil divisions.
DOJ has not provided a framework in its FY 2026 budget proposal for how these enforcement functions would funded. Currently, DOJ has stated that it will move criminal Tax Division attorneys to DOJ’s Criminal Division, and it would move civil Tax Division attorneys to a new “Tax Litigation Branch” of the Civil Division. However, no additional funding was allocated to the Civil Division to pay for the new Tax Litigation Branch.
This dismantling represents more than a budgetary shift. It may erode the core institutional expertise that has ensured consistent and fair application of tax laws nationwide.
The IRS Budget: Enforcement on the Back Burner
Similarly, the IRS FY 2026 Budget reflects a troubling trend. The proposed reductions would significantly roll back enhancements made possible under the Inflation Reduction Act, particularly those aimed at rebuilding enforcement capacity and modernizing taxpayer services. These cuts reduce the IRS’s ability to audit, investigate, and litigate tax noncompliance, especially for high-income and high-complexity taxpayers. Further, as the FBI is called to do more immigration investigations, it is likely that IRS-CI will be asked to work on additional money laundering and fraud cases that may only be tangentially related to tax.
What Taxpayers Can Expect: Audit and Litigation Risk Will Decline—For Now
With fewer IRS personnel and DOJ attorneys to carry out litigation, taxpayers may face lower risk of audit or prosecution. DOJ will be forced to be more selective in which high-dollar civil cases and criminal referrals it takes. However, risk won’t disappear entirely. Some U.S. Attorneys’ Offices may take on more tax cases themselves, especially in politically-motivated or high-profile cases. Expect the new Tax Litigation Branch to prioritize cases that involve victims or the Trump Administration’s priorities of prosecuting fraud and money laundering.
Noncompliance May Increase
Behavioral research suggests that tax compliance diminishes when audit risk declines. Some taxpayers may see this enforcement vacuum as an opportunity to take more aggressive positions or even underreport income. Over time, this could normalize tax evasion among high-income individuals and lead to systemic erosion of voluntary compliance. However, we anticipate that the IRS will be able to detect tax cheats with increasing accuracy when the IRS begins to deploy AI in its enforcement efforts. And any actions taken now may still be open to an audit by the next administration.
Guidance for Oakgrove Clients
At Oakgrove Legal Strategies, we recognize that our clients are navigating an environment of uncertainty, complexity, and rapid change. Here’s how you can stay ahead of the game:
Maintain a High Standard of Compliance
Even in a reduced enforcement environment, high-profile taxpayers remain visible. Whistleblower programs, investigative journalism, and political oversight can still generate scrutiny. Similarly, as the IRS implements AI into its enforcement efforts, we anticipate that the Service will be able to identify tax discrepancies with increasing accuracy. For example, AI could easily identify disparities between minimal reported earnings and an extravagant lifestyle visible on social media. (My article on the IRS, AI and “lifestyle audits” coming very soon). Our advice: maintain conservative, defensible positions across your filings.
Document Everything
Sophisticated planning must be coupled with meticulous documentation. Every structure, transaction, and advisory relationship should be papered to withstand future audits or inquiries, regardless of the current political climate. And please don’t mix personal and business accounts! The attorneys at the Tax Division are very good at piercing the corporate veil.
Consider Voluntary Disclosures Strategically
If there are legacy positions that could present risk in a future, more aggressive enforcement environment, consult us now. Preemptive action may still be possible and advisable.
Keep Strong Advisors Close
In a time when the rules are shifting, experience and clarity matter more than ever. Ensure that your advisory team is proactive, integrated, and capable of anticipating what comes next—not simply reacting to it.
Looking Ahead
Federal tax enforcement has always swung between extremes depending on the political moment. This current shift—reducing IRS capacity and eliminating DOJ Tax Division— may embolden some taxpayers to be more aggressive in their tax positions. But in a different administration, the tide could shift back quickly. The statute of limitations on criminal tax fraud is six years (26 U.S.C. § 6531). And importantly, there is no statute of limitations when a taxpayer fails to file a return at all, fails to report a gift of property under I.R.C. Chapter 12, or files a false or fraudulent return with the intent to evade tax.
If you or your company needs a strategic tax partner that can guide you through these uncertain times, I would welcome the opportunity to connect: Kieran@OakgroveLegalStrategies.com.
