The IRS Budget Cut Is a Lose-Lose, Fiscally Irresponsible Move

Here’s a riddle: Name a way to cut federal spending that will increase the federal deficit.

If you know the answer, then you’ve gone into the weeds of the recent bipartisan debt ceiling agreement between President Joe Biden and House Majority Leader Kevin McCarthy. The agreement would cut the IRS’s budget by $21.4 billion over a three-year period. The nonpartisan Congressional Budget Office projects that cutback will have the perverse effect of increasing the deficit by $19 billion.

Most lawmakers understood the fiscal irresponsibility of cutting the IRS’s budget. And yet, the majority voted to include the first installment of the cutback in legislation titled “Fiscal Responsibility Act of 2023” as Congress scrambled to prevent a debt default.

Just nine months before, lawmakers approved the Inflation Reduction Act, which included an $80 billion boost to the IRS’s budget through 2031. Analysts from academia to the Treasury Department to CBO agreed that increasing funds to the IRS’s enforcement budget would more than pay for itself. The most conservative estimate—and the one that mattered most for budget scorekeeping—came from CBO, which projected that the $80 billion funding infusion would raise $180 billion, for a net reduction in the deficit of $100 billion.

But, as the debt limit agreement demonstrates, lawmakers’ deliberations over the IRS’s budget aren’t always about the money.

From 2010 through 2022, Congress shrunk the IRS’s budget by over 20% in inflation-adjusted terms. For seven years during that period, Congress also froze hiring at the IRS—a difficult situation made worse because the freeze coincided with the aging of the IRS workforce and thousands of employees’ retirement. The IRS workforce declined by 17%, with the largest drop occurring among the highest-skilled revenue officers and agents who handled the most complicated tax returns.

Another factor undermining the efficiency of the IRS was that its information technology infrastructure didn’t keep up with advancements in computing. For example, some of the computer programs that process and store individual income tax returns still rely on programming language developed in the 1970s.

Not surprisingly, the audit rate fell, too. The audit rate for individuals fell from 1% on 2010 returns to 0.3% of 2018 returns. Among filers earning more than $10 million, the audit rate dropped from 21.5% to 9.2%. And for the largest corporations (with at least $20 billion in assets), audits declined from 86.7% of 2010 returns to 57.2% of 2018 returns.

Against that backdrop, candidate Joe Biden promised to increase the IRS’s budget, with enhancements in enforcement of returns filed by the wealthy and big businesses. Five months into his term, President Biden’s Treasury Department released an agenda for tax compliance that proposed an $80 billion boost to the IRS’s budget over 10 years, with over half of those funds committed to tax enforcement. Last August, Congress approved that funding request in the new tax law.

Attacks against the funding boost began immediately, with critics asserting that the funds would be used to hire 87,000 new enforcement agents—an “army of auditors” targeting “Walmart shoppers.”

The Treasury Department was partially to blame for the focus on the 87,000 new employees. Buried in its 2021 compliance agenda was a projection that if the IRS received an additional $80 billion, its workforce would increase by 86,852—or nearly double—by 2031. But, as the IRS strategic operating plan lays out, many new hires will include customer service representatives, lawyers, accountants, and computer scientists.

Further, the 2021 agenda specified that the additional enforcement actions would target the wealthy and large businesses. Audits of small businesses and taxpayers with income below $400,000 wouldn’t increase above historical levels.

Nonetheless, the IRS funding secured last year was placed on the chopping board in the debt ceiling talks.

Some of that recent agreement is clear as to the negotiators’ intent toward the IRS, but other parts are ambiguous.

Start with the statutory language in the debt ceiling legislation. Nearly $1.4 billion would be taken back immediately from unobligated funds provided by the legislation. Other than to safeguard current funding on taxpayer services and business systems modernization, it doesn’t specify how to allocate cuts among enforcement, operations support, and a handful of other purposes.

For 2024 and 2025, the fate of the IRS effectively hinges on a handshake between Biden and McCarthy. Nothing is specified in the actual legislation. According to a White House briefing and press reports, the agreement would repurpose $10 billion in the fiscal 2024 appropriations process and reallocate another $10 billion in fiscal 2025 to other non-defense priorities.

Despite the vagueness of the agreement, CBO—at the request of Senate Budget Committee Chairman Sheldon Whitehouse (D-R.I.)—estimated that the $21.4 billion rollback of IRS appropriations would lead to a revenue loss of $40.4 billion, for a net deficit increase of $19 billion.

The impact on the deficit could grow. If those at the IRS charged with implementation lose confidence in lawmakers’ willingness to sustain funding increases, they may be reluctant to invest long-term in staff and technology.

It’s ironic. Congress named the legislation that sealed the debt ceiling deal the “Fiscal Responsibility Act.” And it is responsible overall, reducing the deficit on net by over $1 trillion, according to CBO. But with respect to the IRS, the agreement is anything but that.

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

Janet Holtzblatt is a senior fellow at the Urban-Brookings Tax Policy Center. Before joining the Tax Policy Center, Holtzblatt was the unit chief for tax policy studies in the tax analysis division of the Congressional Budget Office.

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