Congress Claws Back Another $20 Billion from the IRS
The tax agency's IRA funding was stripped further due to a legislative error.
The IRS recently lost another $20 billion in funds allocated for key enforcement programs, and the consequences could be felt by taxpayers as soon as this year.
Lawmakers failed to unlock the funds during year-end budget negotiations before President Biden’s term concluded. The reserve is part of the original $80 billion monetary infusion the IRS received under the Inflation Reduction Act (IRA). That figure has since shrunk to about $59 billion due to budget cuts, and now even further.
This comes as the IRS faces a myriad of challenges: President-elect Donald Trump aims to oust IRS Commissioner Danny Werfel in favor of former Missouri Rep. Billy Long, and Republicans — who will soon lead both chambers of Congress — have already chipped away about $21 billion in IRA funds.
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Adding to the noise, Trump suggested imposing an ‘External Revenue Service’ on his Inauguration Day. The same week, a dozen GOP lawmakers introduced a bill that aims to abolish the IRS and rewrite the tax code.
Not to mention, Elon Musk, who was tapped as a co-leader of the newly created nongovernmental Department of Government Efficiency (DOGE) under Trump, has made comments suggesting to reform the IRS.
Treasury officials say the latest budget cut will derail the agency's progress and impact taxpayers like you. Here’s what you need to know.
Loss of $20 billion in funding would cause IRS hiring freeze
The IRS workforce may suffer a major blow due to the loss of funding, and the effects will be felt sometime this year.
According to Treasury Deputy Wally Adeyemo, the consequences of the pullback in Inflation Reduction Act funding would result in a hiring freeze within the IRS, and lead to:
- An increase in the national deficit by $140 billion
- 6,000 fewer audits of wealthy individuals
- 2,000 fewer audits of large corporations
“The IRS is going to potentially have to make dramatic decisions about stopping hiring and starting to budget for a world in which they don’t have $20 billion which will stop a lot of their progress,” Adeyemo told the Associated Press.
“If they don’t get that $20 billion that is at risk they would run out of enforcement money at the current pace sometime in fiscal year 2025.”
What’s happening to IRS funding
The stability of IRS funding via the IRA $80 billion injection has already faced previous shake-ups.
- The IRS originally received about $79.4 billion in supplemental funding when President Biden signed the Inflation Reduction Act into law in 2022
- Congress subsequently rescinded $1.4 billion to raise the debt ceiling last year
- The IRA tax enforcement budget was cut by $20 billion again that year, reducing the available IRA funding to $57.8 billion
- That remaining $57.8 billion should be available through Sept. 30, 2031
As of June 2024, the IRS has expended approximately $6.9 billion of the $57.8 billion in IRA funds, according to the U.S. Treasury Inspector General for the Tax Administration (TIGTA). Those funds were used to improve taxpayer services, boost enforcement, and modernize their business systems.
Another $20 billion was clawed back in December from the remaining $57.8 billion IRA budget due to mistakenly duplicated legislative language from another funding bill.
Congress failed to amend the language before year-end, and it’s not certain if the newly-elected Republican-led Congress and President will fight to recover those funds for the IRS.
Has IRA funding improved the IRS?
You may be wondering why Inflation Reduction Act funds are such a contested topic for the IRS.
To date, the IRS has capitalized on IRA funding by ramping up hiring efforts to address its aging workforce and hiring gaps across its departments.
Additionally, the agency modernized some of its aging tax processing systems — some of which date back to the 1960s.
Over the past two years, some significant improvements for the tax agency also include:
- Telephone and customer service dramatically improved, giving callback options to more than 11 million taxpayers
- Expanded in-person service to reach rural or underserved taxpayers
- Created digital solutions to help more people file electronically
You may have also noticed that the IRS has worked to simplify notices and letters sent annually to taxpayers, including notices of tax fraud and scams. As reported by Kiplinger, the agency also shifted attention to the wealthy from working-class taxpayers on audits.
Musk poll points to defunding the IRS
As Kiplinger reported, Musk has suggested cracking down on the IRS. While some immediate changes may include changes to the agency's workforce and leadership, what could be next is its need for funding.
Most recently, Elon Musk, CEO of Space-X and Tesla asked social media users if the IRS funding should be “deleted.”
“The IRS just said it wants $20B more money. Do you think its budget should be: Increased, Same, Decreased, Deleted,” Musk asked X users, previously known as the social media platform Twitter. The answers were glaring.
About 60.6% or more than 212,000 voters opted for ‘deleted,’ while nearly 30% said funding for the IRS should be decreased. Only 5.6% of polled respondents said the agency should receive more funding.
Why are these responses concerning?
After facing budget cuts last year, the IRA funds have shrunk to $57.8 billion. Treasury officials warned that another $20 billion cut would destabilize nearly every department in the agency – mainly its enforcement budget.
According to the Treasury Inspector General for the Tax Administration, the IRA supplemental funding includes caps for its four primary budget activities, these include:
- Enforcement: $24 billion (the IRA originally provided $45.6 billion for enforcement funding, but this was rescinded)
- Operations Support: $25.3 billion
- Business Systems Modernization: $4.8 billion
- Taxpayer Services: $3.2 billion
Rescinding those funds would directly impact taxpayers. With less hiring, the IRS workforce could be limited when tax filing season begins. At worst, that could result in slower tax processing, refund delays, and more high-income taxpayers slipping through audit cracks.
Bottom Line: Why does IRS funding matter?
The IRS has made significant strides to improve its hiring efforts, modernize archaic tax processing systems, and support essential taxpayer services over the past two years.
Those improvements have been made possible due to funding from the Inflation Reduction Act, and now, those funds have been chipped away further.
According to Treasury officials, revoking another $20 billion of IRA funds would result in a hiring freeze, and thousands of fewer audits to the wealthy as well as larger corporations.
While audits may not concern you, a hiring freeze may impact your taxpayer services this tax season. Some problems that could return include inefficient telephone service, lack of customer service, spikes in scams due to slow IRS notices, and slower tax processing.
It remains unclear if the new Trump administration will fight to recover those funds. So stay informed as these decisions may impact your tax experience sooner than you think.
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