As lawmakers and government officials probe the Internal Revenue Service’s targeting of conservative groups, tax cheats may be smiling.

In addition to facing multiple congressional hearings and a change in leadership, thanks to budget cuts, the IRS is also about to begin furloughing employees. As MarketWatch contributor Eva Rosenberg notes, the IRS hasn’t been under this much scrutiny since the hearings in the 1990s that led to the Tax Reform and Restructuring Act of 1998, which reorganized the IRS and created new rules for how employees identify themselves and conduct audits. At the time, the changes made employees wary of being scolded for taking enforcement actions, causing IRS audits to drop off significantly, says Floyd Williams, a former legislative affairs director for the IRS.

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Indeed, in the years following the 1998 restructuring, audits fell by as much as 50% to 620,000 audits on individual tax returns in 2000, according to IRS data. The share of individuals audited — already small — also dropped from 1% to 0.5% in that same time period. “People felt constrained and probably let a lot of things go they shouldn’t have,” says Williams, who was in charge of keeping lawmakers up to date on the changes.

The inquiries, hearings and staff changes happening now could have a similar chilling effect on enforcement this year, Williams says. The investigation comes as the agency is dealing with pay freezes and partial hiring freezes, he says. Budget cuts were already expected to diminish the chances of getting audited. (The IRS is scheduled to be closed Friday because of the budget cuts, with four other closures planned for this summer.) The agency has previously told MarketWatch that it started this year with 7,000 fewer full-time employees than it had at the end of 2010 and staffing for key enforcement positions is down 6% in the past year.

To be sure, any impact on enforcement may be less dramatic this year than it was in the 1990s, since the IRS is being examined for its treatment of tax-exempt organizations, and not for its handling of audits and collections. The 1998 law also led to a reorganization of the IRS, which could have contributed to the decline in audits, says Williams. It’s not clear yet if the latest scandal will lead to legislation.

Why the IRS scandal is good for tax cheats

Still, the added scrutiny could have a ripple effect across the agency, says Williams. The Treasury inspector general for tax administration released a report last week showing that the IRS began using “inappropriate criteria” to identify organizations applying for tax-exempt status for political intentions in early 2010. After it was released, President Obama announced the resignation of former acting commissioner Steven Miller, who was criticized for not letting lawmakers know of the problems as he learned of them. Later, Obama appointed the controller of the Office of Management and Budget, Daniel Werfel, as acting commissioner of the IRS. The IRS did not immediately respond to requests for comment. Former IRS commissioner Doug Shulman told lawmakers today the IRS is unprepared to handle the flood of applications for tax-exempt status from politically active entities.