Billions of Dollars to Be Reduced in IRS Funding

The bipartisan deal to raise America’s debt ceiling involves cutting billions in funding set aside for the Internal Revenue Service (IRS), including cuts from the $80 billion allocated under the Inflation Reduction Act (IRA).

In total, the debt-ceiling deal involves shaving off almost $21.4 billion from the IRS budget. Out of the roughly $21.4 billion, nearly $1.4 billion will be rescinded from the money already allocated to the IRS, the deal states (pdf). The remaining $20 billion would come from the extra $80 billion allocated to the IRS under the IRA for a 10-year period. As to whether the $20 billion excision would affect the yearly utilization of the extra funding, a White House official rejected the possibility during a press briefing on May 28.

“It’s not as if the IRS has appropriated $10 billion for one year, $10 billion for the next, etc.,” the official said, while pointing out that the $80 billion amount sanctioned for the IRS is for the full 10 years. “And so, the IRS will continue to be able to spend that, you know, remaining $60 [billion], and spend that over the course of the next several years.”

This could mean that in six to eight years, there would be a need to “come back and ask for more IRS funding,” the official said, similar to how there was going to be a need to ask for such funding after the 10-year period ran out.

“So, we don’t think it’ll fundamentally change what the IRS does over the course of the next few years,” the official stated.

Reduced IRS Funding

A May 30 report (pdf) from the U.S. Congressional Budget Office (CBO) states that the $1.4 billion reduction in IRS funding would result in federal revenues getting reduced. The agency calculated a net increase in deficit of $900 million over the next 10 years.

In April, the IRS had detailed a plan (pdf) on how it would spend the extra $80 billion. Some of the measures included making it easier for taxpayers to interact with IRS through various means of communication, resolving more issues quickly for taxpayers who face complicated tax challenges, modernizing the IRS’s technology, expanding enforcement, and hiring and retaining a highly skilled workforce.

Now with a part of the $80 billion said to be cut off, there are concerns as to which of the measures detailed in the IRS’s spending plan would be affected.

In a June 1 post at the Tax Policy Center, senior fellow Janet Holtzblatt points out that “some may view the cuts as a signal that neither Congress nor the administration is fully committed to the IRA funding.”

“If those at the IRS charged with implementing IRA lose confidence in the willingness of lawmakers to sustain funding increases, they may be reluctant to commit to years-long investments in staff and technology.”

IRS Staffing Issues

During a tax forum in Washington on April 17, Wally Adeyemo, deputy secretary of the Treasury Department, had said that the agency intended to use part of the $80 billion allocation on recruiting tax attorneys, data scientists, and accountants.

He pointed out that the IRS is presently staffed at roughly the same level as in 1970 when the population of the United States was only around 203 million. As of 2020, the population jumped by 63 percent, to more than 331 million.

To audit an average wage earner, it takes roughly five hours of time, Adeyemo said. But to audit citizens within the top 1 percent of earnings, it can take up to 250 hours for just the preparation process. Over the last decade, audits on millionaires have dropped by 70 percent, he noted.

Adeyemo also pointed to customer service as having suffered due to staffing shortages. The IRS has already hired 5,000 additional workers to deal with the issue.

“When you look at the level of service in terms of phone calls being picked up, it was woefully poor, under 15 percent. This year we’re about 85 percent. We’ve answered two million more calls. We serve hundreds of thousands more people in person,” he said.

“By the time we’re done with these investments, the IRS goes from an agency in which the technology infrastructure was built in the 1960s—before we had an ATM, before we had personal computers—to one that is a twenty-first-century agency.”