Debt-Limit Deal Speeds Up Fight for Additional IRS Funds

A cut to the IRS in the debt-limit deal injects new uncertainty into the agency’s long-term overhaul plans, accelerating a fight over the agency’s future once it exhausts the remaining multiyear funds.

A deal brokered between the White House and House GOP leadership included a roughly 25% reduction to the $80 billion in supplemental funding from last year’s tax-and-climate law. There’s optimism the agency can keep its plan to replace technology and improve enforcement, but some expressed concern that future talks may whittle away more of the shrinking funds.

“A major purpose of the initial $80 billion multiyear investment was to enable the IRS to make long-term investments and have the confidence that the money would be there,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “Seeing a cut of this magnitude so early may shake that confidence.”

Holtzblatt, a former Treasury official, said she doesn’t believe the cut derails all the agency’s overhaul plans—there’s still $60 billion the agency can pull from—but it may make IRS officials wary.

“A major purpose of the initial $80 billion multiyear investment was to enable the IRS to make long-term investments and have the confidence that the money would be there,” she said. “Seeing a cut of this magnitude so early may shake that confidence.”

Legislation raising the debt limit that’s likely to get a House vote Wednesday includes a $1.4 billion clawback of supplemental IRS funding provided in the Inflation Reduction Act. The agreement that yielded the bill also includes repurposing $10 billion of the IRS’s IRA money in each of fiscal 2024 and 2025 to reduce funding cuts to other non-defense programs.

Deputy Treasury Secretary Wally Adeyemo on Tuesday said the IRS has sufficient funds in the short term and the administration will push for additional funds in the future.

National Treasury Employees Union National President Tony Reardon also said in a statement that the union expects the agency has enough funds in the near term to rebuild staffing levels and ensure tax laws are enforced fairly. The union “will fight for any reprogrammed money to be replaced,” he added.

Democrats argued cuts to enforcement funds will add to the deficit, because the IRS will have fewer resources to go after tax cheats.

The Congressional Budget Office agreed in a report out late Tuesday.

Clawing back the roughly $1.4 billion from the IRS would add an estimated $900 million to the deficit over the 2023-2033 period, according to an estimate from CBO.

The CBO estimated the debt limit bill would reduce the deficit by $1.5 trillion over that same period.

Rep. Richard Neal (D-Mass.) acknowledged that taking back the money stings.

“I understand that you have to give and take in a negotiation,” said Ways and Means ranking member Richard Neal (D-Mass.). “The money is being diverted to other initiatives, so in that sense there’s some reason to it. But we’re going to continue to fight for it.”

Funding Exhausted Faster

During a Monday briefing with Democratic House staff, White House officials said IRS money that was supposed to last for 10 years will now only last for about eight, according to someone on the call.

An IRS document released in April, before the recent deal, expected spending of the mandatory funds to be $12.1 billion in fiscal 2030 and $14 billion in fiscal 2031.

The IRS expects to spend all the taxpayer services funds by the end of fiscal 2026 and all the business-systems modernization funds by the end of fiscal 2028, according to the document.

A reduction in IRA funding won praise from Republicans, some of whom have falsely warned the bulk of the money would go to armed agents hounding taxpayers.

“I see this as a great opportunity to change the direction of the priorities more toward customer service than enforcement,” Rep. Adrian Smith (R-Neb.) said.

Smith introduced a bill with Rep. Michelle Steel (R-Calif.) in the last Congress that called for clawing back all but the funds for taxpayer services and business systems modernization. Legislation mirroring that bill was the first lawmakers voted on at the beginning of the new GOP-led Congress.

Whether he believed more should be cut from the IRA money like his bill, Smith said it depends on the agency’s performance.

Calls for More Funds

Even before the debt-limit deal, the Biden administration had been seeking additional IRS funds in the long term. The president’s fiscal 2024 budget, released in March, included a proposal for more mandatory IRS funds for enforcement and operations support of $14.3 billion in fiscal 2032 and $14.8 in fiscal 2033, on top of requesting a 15% increase in the IRS’s annual appropriation.

It could be a challenge for the IRS to get more mandatory funding down the line, as Republicans have criticized the administration for asking for more IRS funds in the budget proposal.

John Koskinen, who served as IRS commissioner from 2013 to 2017, said it could be more difficult for critics of the Inflation Reduction Act funds to oppose future funding if the IRS demonstrates that it uses the funding it already has to make improvements.

“My thought has been that if real progress continues to be made, as it was made in this year’s filing season for taxpayer service, it will be easier for even the opponents to understand that they are buying an improved and streamlined IRS with the funding,” he said.

But Koskinen expressed concerns about whether Republicans will pursue cuts to the IRS’s annual appropriations in addition to the reductions to the multiyear funding, which could “force the IRS to spend some of the IRA money on just running the place on a day-to-day basis.”

David Kamin, faculty director for the New York University Tax Law Center and former Biden administration official, hoped that this would be the last time that funding is used as a bargaining chip.

“I would hope looking ahead this means that policymakers do more to defend IRS funding,” he said. “Both when it comes to base appropriations and also the mandatory money that was part of the Inflation Reduction Act.”

Sen. Chris Van Hollen (D-Md.), the chairman of the Senate Appropriations subcommittee overseeing IRS funding, argued the money was justified and highlighted how the money already improved this year’s filing season.

Van Hollen’s House Appropriations counterpart, Rep. Steny Hoyer (D-Md.), the ranking member of the subcommittee overseeing IRS funding, pointed to estimates that reducing IRS investment would allow the wealthiest Americans to avoid paying taxes.

Both promised to work toward maintaining regular appropriations, which Democrats argued would allow the supplemental funding to improve long-underfunded capital projects.

“I will keep fighting to secure the resources that the IRS needs to maintain a fair and efficient tax system,” Hoyer said in a statement. “That effort includes pushing for the 15% increase in IRS funding that President Biden outlined in this year’s budget proposal.”