When then-acting commissioner Douglas O’Donnell stepped down from the top post at the Internal Revenue Service last year, the second Trump administration had just initiated what would become sweeping staff cuts.   

Roughly a year and a half later, the Department of Government Efficiency — once led by the chain-saw wielding billionaire Elon Musk — has closed its doors, leaving the tax agency and businesses grappling with the impacts of the slashed federal workforce. 

O’Donnell, who logged a four-decade career at the IRS, is now with Big Four firm KPMG where he has served as co-lead for its tax controversy and dispute resolution services since last summer. 

As he advises corporate clients on their tax strategies, he’s seen the IRS’ annual discretionary budget fall from just over $12 billion in fiscal 2025 to $11.2 billion in fiscal 2026. The administration’s proposed discretionary budget for fiscal 2027, meanwhile, stands at $9.8 billion. 

If enforcement staff continue to be cut, O’Donnell said there will be fewer audits, which may in turn influence the behavior of taxpayers. “There can be somewhat of a race to the bottom in terms of whether or not people are going to report all of their income or not,” O’Donnell told CFO Dive this week.

Asked whether O’Donnell’s departure from the IRS was in response to DOGE’s reported bid to gain access to the IRS’ sensitive personal taxpayer data, a KPMG spokesperson shared a statement in response: “After serving two separate stints as Acting Commissioner, Doug decided it was the right time to conclude his public service and to continue helping organizations navigate complex challenges during a dynamic period in tax administration,” the statement said.

Revisiting tax risk paradigm

To be sure, it’s a bit early to say whether companies are in that “race to the bottom,” and whether and which type of companies will push the envelope to more aggressive tax strategies that are on the edge of compliance, O’Donnell said in an interview.

O’Donnell sees compliance more likely dropping with private companies, high wealth individuals and small businesses rather than large public companies which have auditors and legal advisors. In instances where there is less data and less reporting, people and entities can doubt what their neighbors or competitors are doing and they don’t want to feel like they’re overpaying, he said.

But O’Donnell said companies reconsidering their tax approach in the current climate need to think about their “risk paradigm,” and how much uncertainty they want to bridge before moving ahead with a more aggressive strategy.  

“You don’t know when things are going to turn around and whether the IRS might get funding and they may be able to hire large numbers of experienced people and then begin to conduct audits of taxpayers that they’ve not been able to,” O’Donnell said. 

O’Donnell also pointed out that there is normally a three year statute of limitation on audits, meaning that the IRS has until 2030 to audit a 2026 tax year return filed in 2027. By that time, there could be a policy shift toward more aggressive enforcement. Companies’ filings could also be vulnerable to audits for longer if they are carrying forward losses.

“There’s a lot to consider in that space,” O’Donnell said. “It gets down to the risk profile. My advice is to comply and to get the right help to make sure you’re within the bounds. But there are companies…that will push the envelope farther than I would.”

Dispute prevention routes

For CFOs interested in tax certainty and avoiding tax disputes with the IRS, there are options. O’Donnell said he is a big proponent of a number of existing programs — some of which he was involved in developing — that are designed to foster a cooperative relationship between businesses and the IRS. 

For big companies, the compliance assurance program, under the auspices of the agency’s Large Business and International Division, is effectively an audit conducted before a return is filed. The goal is for the IRS and the taxpayer to pre-examine all items that are expected to have a material impact on the company’s federal tax liability, so that the taxpayer can be confident that filing a return in accordance with what’s been agreed to will avoid a dispute, he said. 

Currently there are about 120 large companies across the U.S. that are taking part in the program. But now there are some questions emerging about it in the current era.

“Some taxpayers are stepping back and wondering...`Do I want to be in a program where I’m going to be audited, if the size of the exam function of the IRS is shrinking and I may not get audited at all?’” O’Donnell said. “I think that gets down to the individual risk calculus of a company, their CFO, their head of tax. Do they want to be in a cooperative program where they can gain certainty sooner?”