Congress Must Undo the Damage Following the IRS Funding Ransom

Debt ceiling negotiators rescinded $21 billion of the $80 billion infusion the IRS badly needed to rebuild and modernize its depleted operations—this, after House Republicans demanded eliminating all of those funds under threat of US default and economic chaos.

Paying that ransom in full would have thwarted the IRS’s rebuilding efforts so it can collect legally owed federal revenue and improve customer service for years to come. As it is, losing a quarter of that funding threatens serious damage that Congress has the power—and responsibility—to undo.

Meanwhile, the IRS should do exactly what it laid out to do in its strategic plan (and what it’s begun to deliver on): having the staff necessary to answer the phones so tax filers can get answers and creating new customer service tools; modernizing outdated computer systems; and hiring the auditors needed to review complex tax returns and collect taxes from wealthy households trying to cheat (and, in turn, reduce the number of people who try to cheat).

Making the IRS a high-functioning agency should be a bipartisan issue. Sadly, that hasn’t been the case in recent years. Just as they did in the 1990s and again in 2011, Republicans have demonized the IRS and targeted its budget when they took the House under a Democratic president.

The results have been devastating. A severely under-resourced IRS couldn’t answer many taxpayers’ phone calls or challenge wealthy tax cheats, with the latter contributing to the roughly half-trillion-dollar annual tax gap. The audit rates of millionaires fell by more than 80% between 2010 and 2018.

Wealthy people’s tax returns are complex, with many offshore, often hidden, accounts and multi-level partnerships with frequently opaque money flows. It takes many highly trained auditors to review and audit them if necessary. The result of Republican budget cuts, meanwhile, was an IRS with fewer sophisticated auditors than at any time since 1953.

An IRS rebuild was an urgent priority when Democrats secured the presidency and a congressional majority in 2021. That is why Congress provided the IRS with an extra $80 billion. With an agreement to eliminate one-quarter of the funding, the task now is to undo any damage.

Congress needs to do four things:

It must stop pretending that IRS funding is a piggybank—pretend being the operative word. It’s widely understood that cutting IRS funding increases tax cheating and deficits. By contrast, when Congress invests in the IRS, tax collections go up. This is why the Congressional Budget Office estimates that the $21 billion cut will lead to $40 billion in lost revenue, for a net cost of $19 billion.

It needs to provide the $14.1 billion in IRS base funding for 2024 that the administration’s budget requests. The IRS rebuild and modernization requires a two-tiered funding stream: base funding provided annually through the appropriations process combined with the Inflation Reduction Act’s supplemental, long-term funds. Both are essential.

It needs to replenish and make permanent this supplemental funding stream during the 2025 tax debate. The 2017 tax cuts were expensive, tilted to the wealthy, and failed to deliver the economic growth—or the revenues—that was promised. A course correction is needed when the 2017 law’s individual and estate tax provisions expire in 2025. As part of this legislative action, Congress needs to restore the $21 billion and create a permanent funding stream to ensure the IRS avoids a steep funding cliff toward the end of the decade. After all, we don’t want to fire all the new people in a few years and again allow the newly upgraded IT systems to degrade.

Some Republican members of Congress should stop spreading misinformation and demonizing the civil servants who work for the IRS and really, for all of us. Moreover, policymakers at every turn should make it clear that cheating on your taxes is wrong.

The Inflation Reduction Act has already yielded promising early results, and Treasury has released its strategic plan, which must be implemented as scheduled. Computer systems need to be upgraded. Auditors need to be hired, trained, and put to work to reverse the trend of plummeting millionaire audits.

The IRS needs to deliver the tax filing experience honest taxpayers deserve. With Congress’ help, it still can.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Chuck Marr is the vice president for federal tax policy at the Center on Budget and Policy Priorities. His previous roles include economic policy adviser to former Senate Majority Leader Tom Daschle, senior adviser at the White House National Economic Council, and strategist with Lehman Brothers.

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