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The Trump administration is expected to reduce enforcement at the IRS and the Securities and Exchange Commission (SEC) due to fewer resources and a narrower scope of investigation. The SEC, under Commissioner Paul Atkins, plans to focus more on explicit violations, refrain from creating new rules through aggressive policing of gray areas, and is shifting away from corporate fines towards individual penalties. Meanwhile, IRS enforcement has been destabilized due to rapidly changing leadership and declining staffing and budget authority; with the federal tax gap currently exceeding $600 billion, even minor improvements in enforcement could significantly increase revenue.
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Trump Administration’s Regulatory Changes: Impact on IRS and SEC
There are indications that the Trump administration’s actions will result in a reduction in enforcement resources and a narrower enforcement scope at the IRS and the Securities and Exchange Commission (SEC) by 2026. These changes could have significant implications for auditors, accountants, tax advisors and their clients, with potential costs, benefits, and negative effects.
Modifications to SEC’s Enforcement Strategy
Due to buyouts and early retirements, the number of employees at the SEC has seen a decline of about 15%. As a result, the SEC is on track to record its lowest number of enforcement actions for earnings fraud and auditor liability since the Reagan administration.
This statistical decline is a result of a deliberate shift in strategy under Commissioner Paul Atkins, who pledged to return the SEC to its core mission. Atkins’ enforcement philosophy is centered on: pursuing clear violations that harm investors, avoiding regulation by enforcement, and moving away from policing technical violations and levying corporate-level fines.
This change in enforcement strategy is aimed at strengthening capital markets by reducing regulatory costs whilst maintaining investor safety. However, a key question is whether this move away from a “broken windows” enforcement policy reduces deterrents for major frauds. A recent study by Nathan Herrmann at UT Austin indicated that stepping back from minor incidents could potentially allow large-scale accounting fraud to occur at higher rates.
IRS Enforcement: A Diminishing Capacity
The IRS’s enforcement capacity is experiencing a less strategic and more disruptive decline, compared to the SEC’s intentional recalibration. With seven different commissioners within less than a year, the IRS is facing a level of instability that severely challenges the execution of a consistent enforcement philosophy.
The IRS is also grappling with over a decade of dwindling staffing and budget authority. The repercussions are significant, with the latest estimate of the federal tax gap—the amount of legally owed tax revenue that goes uncollected—surpassing $600 billion in 2022. This amount is approximately 10% of the federal budget and is similar to annual Medicaid spending.
Ongoing Responsibility for Financial Professionals
Changes in the enforcement landscape across the IRS and SEC present a mix of risks and opportunities for financial professionals and the companies they advise. Despite anticipated decline in IRS enforcement, tax professionals should not see reduced audit rates as equivalent to reduced compliance obligations. With the tax gap already sizable, future administrations under fiscal pressure may seek to increase enforcement or re-evaluate previous-year filings.
Even with the SEC’s decline in case volume, audit and accounting practitioners should not interpret this as a relaxation of standards. Cases involving major violations such as accounting fraud, market manipulation stay high priorities with severe penalties for individuals involved in these malpractices. Hence, firms should persist in investing in strong internal controls, solid governance, and meticulous documentation.
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