Alarming IRS Forecast Reveals a $500B Collapse in Revenue, Threatening US Financial Stability

US Internal Revenue Service (IRS) collections account for 95% of annual federal revenue. However, collections this year could drastically fall by 10% or £387.22 billion ($500 billion) compared to a year ago amid major workforce downsizing and dynamic taxpayer behaviour, reported The Washington Post, citing sources from the IRS and the US Treasury Department.

Federal officials expect reduced revenue this year as the April 15 tax filing deadline nears. Under US President Trump's directives, the Department of Government Efficiency, led by Elon Musk, has planned to trim the IRS workforce by 20,000 employees, with over 11,000 already laid off. The IRS is working harder to reallocate resources to keep internal systems operating, which has compelled it to drop several major investigations.

The agency has observed growing talk about people not planning to pay taxes this season and even claiming deductions and credits despite ineligibility due to less concern about being audited. The IRS had warned before Trump took Office for the second time that his transition team's agenda to reduce staff could significantly impact revenue.

'Aggressive reductions to budget and personnel capacity risk backlogs, delays, reduced receipts, and diminished capacity to build next-generation digital capabilities,' a January presentation from tax officials said.

A reduced tax collection would contrast the strong economic gains last year when the US GDP jumped by 2.8%. Meanwhile, personal income at 2024 end was 8% higher than a year earlier, and the US stock market had gained over 20%.

Government's Ability to Manage Cashflow for Bills to Run Out Mid-year

The reduced tax collection projections coincide with estimates that the US government will run out of cash to repay debt as early as June unless Congress raises the debt ceiling. It is only a few months from now.

The cash crunch due to the £27.88 trillion ($36 trillion) debt limit has put more constraints on the government's ability to borrow. Note that the US Treasury Department has been utilising 'extraordinary measures' since January to avert defaulting on its massive debt.

The latest Bipartisan Policy Center report said the government's ability to manage cash flow to pay bills on time will run out between mid-July and early October this year unless Congress intervenes. The timeline significantly depends on the outcome of the current tax collection season. Lower collections could bring the deadline sooner.

'Although it is quite unlikely if collections from tax season fall far short of expectations, there is a potential for heightened X Date risk in early June ahead of quarterly receipts on June 15,' the report said.

The X Date is the estimated window when the US Treasury can no longer meet its financial obligations in full and on time.

'Fiscal responsibility is not just about avoiding financial calamity time and time again—it's about ensuring economic stability and paying our bills on time,' said Margaret Spellings, CEO of the Bipartisan Policy Center. 'This year presents many opportunities to begin getting our fiscal house in order without risking the full faith and credit of the United States. Policymakers must commit to responsible budgeting, which starts with avoiding debt limit brinksmanship and its impacts on our economy.'