inside the IRS: Why the System Is Broken

founder Gabe Hogan sits down with John Hyre to go behind the scenes of the IRS.

Go behind the scenes with John Hyre and Gabe Hogan

The Internal Revenue Service is widely viewed as a powerful, efficient enforcement arm of the federal government. But inside the agency, the reality is very different. Former IRS agents and tax attorneys describe an organization constrained by outdated technology, weak incentives, bureaucratic paralysis, and a culture that often undermines its own mission.

Below is an overview of how the IRS really operates, why so many processes break down, and what taxpayers should understand about audits, appeals, and compliance.

1. It’s Almost Impossible to Fire an IRS Employee

IRS agents operate under a powerful union structure.

Managers report that:

• Firing an employee is extremely difficult

• A failed attempt becomes “retaliation”

• Instead of removing poor performers, the common solution is to promote them out of the way

This results in inexperienced or under-qualified personnel occupying roles that require high-level judgment and technical skill.

2. Outdated Technology Limits Efficiency

Despite handling the nation’s most sensitive financial information, the IRS still relies on MS-DOS–based systems for core taxpayer records. Agents routinely:

• Log into black-screen terminals with 1980s-era commands

• Fax documents between offices

• Manually search for paperwork lost in physical machines

Modernization efforts consistently stall because there is no internal incentive for risk. If a manager approves a tech overhaul and something fails, they accept the blame—so most opt to change nothing.

Outdated, Even in 2019

Despite handling the nation’s most sensitive financial information, the IRS still relies on MS-DOS-based systems for core taxpayer records

3. The System Runs on “Voluntary Compliance” and Fear

The IRS does not have the resources to police the entire population. Instead, it relies on:

• High-profile prosecutions of celebrities and public figures

• Strategic media releases about tax convictions

• Internal press pushes when tax preparers are disciplined

This creates a deterrent effect designed to encourage taxpayers—and especially accountants—to be conservative, risk-averse, and compliant without direct enforcement.

Roughly 97% of IRS audit victories come from the taxpayer’s inability to prove deductions—not from illegal tax positions.

4. Materiality Drives Audit Behavior

Most audits do not turn on sophisticated legal questions, they turn on substantiation and materiality:

• Agents look for low-hanging fruit, not perfection

• Issues that fall “close enough” to reasonable are often ignored

• Completely unsupported deductions (e.g., travel, auto, meals without documentation) become easy targets

Roughly 97% of IRS audit victories come from the taxpayer’s inability to prove deductions—not from illegal tax positions.

5. Appeals Is Often More Reasonable Than the Audit Level

Audit agents have limited discretion. They can only allow or disallow deductions—no partial settlements.

Appeals Officers, however, can negotiate using “hazards of litigation,” which often leads to:

• Partial allowance of deductions

• Faster, fairer resolutions

• Avoidance of unnecessary escalation

Professionals who understand this structure often advise letting unreasonable audits close so the case can be argued at the appeals level.

6. Staffing Turnover Is High—and Experience Levels Are Dropping

Large waves of senior IRS employees have taken buyouts or retired, leaving:

• A significant shortage of experienced agents

• An influx of newly trained auditors

• Increased audit volume, but lower audit quality

New agents often misunderstand tax issues, rely heavily on checklists, and are intimidated by complex fact patterns.

For taxpayers, this means more audits—but also more opportunities for strong representation to correct errors early.

Bureaucracy = No Incentive

Without incentives for excellence, many agents simply do the minimum required to clear their caseloads.

7. Bureaucracy Discourages High Performance

Agents describe a structure where:

• Performance ratings are standardized

• Extra effort is rarely rewarded

• Initiative often creates more paperwork rather than advancement

Without incentives for excellence, many agents simply do the minimum required to clear their caseloads.

This has downstream effects on:

• Response times

• Audit quality

• Issue resolution

• Overall morale

8. What Taxpayers Should Take Away

Understanding the IRS’s internal dysfunctions helps taxpayers approach compliance and audits more strategically:

Documentation is more important than strategy

Most taxpayers lose not because of tax law, but because they can’t prove what they did.

Professional representation matters

Knowing how agents think—and how to escalate strategically—can dramatically change outcomes.

The IRS is not the unstoppable force it appears

It is a bureaucratic agency with significant internal weaknesses, uneven expertise, and strong incentives to settle cases rather than litigate.

Fear is part of the system by design

Taxpayers who understand their rights and obligations operate from a place of strength, not intimidation.

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