More money is helping the IRS. Republicans still want to cut its budget.
House Speaker Mike Johnson (R-La.) and Senate Majority Leader Charles E. Schumer (D-N.Y.) agreed last weekend to rescind IRS funding as part of 2024 budget negotiations, although the deal must still pass Congress. Instead of the $80 billion over 10 years granted as part of Biden’s landmark Inflation Reduction Act, the IRS will get $60 billion, of which $25 billion will go toward tax enforcement.
Biden did agree last year to about $20 billion in IRS cuts during talks with Johnson’s predecessor, Kevin McCarthy (R-Calif.), in exchange for suspending the debt ceiling. But those cuts would have been phased in more slowly than the new proposal.
Johnson hopes to pull back another $10 billion from the IRS in the 2025 budget, although those talks are a long way off. Democrats hope to take control of the lower chamber in November’s elections.
The extra funding was designed to help the IRS staff up with experts who can decode complex tax-avoidance plans that slipped by agents in years past, and to improve technology tools to make it easier for individuals to file, increasing voluntary tax compliance. IRS Commissioner Daniel Werfel and White House officials have pledged the IRS will not use the new funding to increase audits on earners making less than $400,000 a year, although an August report from the Treasury inspector general found the agency lacked the ability to identify taxpayers at that income threshold.
Republicans have assailed the funding, accusing liberals of supersizing tax collection to sic the IRS on middle-class Americans, charges that have led to violent threats against federal workers. The tax service has long been a conservative bugaboo, and GOP-forced budget cuts sent IRS performance on a downward spiral during the 2010s.
Biden administration officials say the cuts to the increased budget would not affect the IRS’s investment strategy or improvements in the near term. But the repeated debates over its funding threaten to upend the long-term and expensive task of modernizing the federal tax collection service — and Biden’s bid to use tax fairness as a populist economic plank in his reelection campaign.
“The way to think about it is the fairness argument,” Deputy Treasury Secretary Wally Adeyemo told The Washington Post. “That gets down to the fact that we know millionaires and billionaires don’t pay their taxes like you and I do. There’s no American who likes to be treated unfairly and know the wealthy live by a different system.”
Werfel told The Post that the budget cuts would not affect the agency’s operations in the run-up to this tax season, nor its modernization over the next few years.
The original $80 billion in funds from the Inflation Reduction Act were supposed to last 10 years, and IRS leadership planned to load most of the money into the last few years, agency leaders said, to complete the most costly technological modernizations and sustain hiring drives. Now, the agency plans to shift that spending up by two years, Werfel said.
The commissioner, though, did issue a warning to lawmakers about the long-term effects of cutbacks.
“Any proposed IRA funding rescission to IRS technology modernization efforts would delay the delivery of several planned improvements and require further use of modernization funds to pay for ongoing IT operations rather than enhancements,” Werfel wrote in December to Sen. Ron Wyden (D-Ore.), chair of the Senate Finance Committee, according to a copy of the letter obtained by The Post. “This includes the potential for stopping or ending support for improvements the IRS has recently delivered.”
Republicans, though, said cutting back the IRS money was essential.
“That’s low-hanging fruit, in my view, to go after the IRS expansion,” Rep. Bob Good (R-Va.), chair of the archconservative House Freedom Caucus, said in an interview. “The American people don’t support that.”
The IRS was in desperate need of modernization. For years, it has used computer coding language that dates to the 1950s; it has dozens of separate case-management systems, tying customer service representatives in knots as they attempt to help befuddled taxpayers. In 2022, the agency answered a mere 13 percent of its taxpayer-assistance phone calls.
It is routinely outgunned on potentially lucrative collection cases involving wealthy individuals, business partnerships and corporations with access to high-octane accountants and tax attorneys.
But the 2023 filing season marked a stunning turnaround, according to tax practitioners. The IRS staffed up its call centers and answered 85 percent of taxpayer calls, according to the Taxpayer Advocate Service, an independent watchdog within the agency. It eliminated its backlog of paper returns, which had reached 24 million in 2022.
The IRS invested in scanners that can digitize documents for quicker processing — and faster issuing of refunds. It is set to pilot a government-backed, free tax-filing system and begin hiring high-value collections experts. In October, the agency announced that in its first 100 enforcement actions taken against millionaires with at least $250,000 in tax debt, it collected $122 million.
“There were improvements in response time and rate of response. That’s obviously successful. At the same time, they’ve spent a lot of the services money up front, and a lot of those improvements are in services hiring, adding people to answer the phones. And if that money runs out, you haven’t built a system that’s self-perpetuating, or could keep going if you don’t have the same number of people to answer the phones,” said Alex Muresianu, senior policy analyst at the right-leaning Tax Foundation think tank. “On the whole, I think it’s been fairly successful, based on the services side. And on other aspects like technology and enforcement, we still have to wait and see.”
White House officials say they hope the service improvements — with more to come — will help convince voters and lawmakers to support additional IRS funding in the near future.
In the meantime, Werfel said, his agency will be “full systems go” to spend money on technological investments and more staffers.
“I think we have to maximize impact early on,” Werfel told The Post. “I think we have to show measurable market impact. Taxpayers need to see that we are more accessible, that we are supporting and protecting them from tax scams. I don’t want to hold back, because at the end of this 10 years we have less money than we used to.
“With $60 billion from the Inflation Reduction Act, this is a once-in-a-generation possibility to deliver that kind of impact. If we pull back on that, we only harm the taxpayer.”
Republicans have claimed victories in drawing back that funding — and they’ve tried for more. A House-passed bill in November to provide $14 billion in emergency aid for Israel paired the money with the same amount of cuts to the IRS, a move that nonpartisan analysts say would cost taxpayers more money by hampering the agency’s ability to collect revenue. That failed in the Democratic-controlled Senate.
“I think one of the best things Speaker Johnson has done in his short tenure is to require the Israel supplemental to be paid for and to pay for it with reducing the IRS expansion,” said Good, the House Freedom Caucus chair.
The $20 billion in cuts in the proposed 2024 budget would leave a $10 billion hole in the 2025 budget, too, which the GOP aims to lock in during future spending talks.
“In little more than a year since Democrats’ [Inflation Reduction Act] was enacted, Republicans have now repealed roughly half of the funding Democrats handed the IRS to ramp up audits on taxpayers,” said Grover Norquist, the anti-tax crusader who leads Americans for Tax Reform. “More cuts to the IRS will come.”
But the White House’s top budget official told reporters last week that the administration would not agree to more cuts.
“We have to stop at $20 billion,” Shalanda Young, director of the Office of Management and Budget, said at a breakfast sponsored by the Christian Science Monitor. “That is a necessity to ensure that we can continue to undertake what I think is a game-changing opportunity to look at the top 1 and 2 percent in this country who do not pay what they owe because they know IRS is so understaffed that they can cheat the system and no one will ever come knocking on their door.”
Wyden, the top tax legislator in the Senate, agreed. “Every single time there is a discussion about government, these people live and breathe for trying to find ways to get relief for wealthy tax cheats,” he said. “We’re going to push back.”
Even some of the tax agency’s biggest external supporters worry about the choices the IRS may make when it runs short on funds. A January 2023 study published by researchers at three universities and the Treasury Department found that the IRS audited Black taxpayers at significantly higher rates than non-Black taxpayers, although there is no evidence that Black taxpayers perpetrate fraud at a higher rate than any other demographic.
Tax examiners do not know the race of the people they are auditing, but the algorithms the IRS uses to monitor fraud around the earned-income tax credit — one of the country’s largest social safety net programs — target filers who make errors on their returns and do not report business income. The result, the researchers found, is that the algorithms are more likely to identify Black taxpayers for audits. That may have been a result, researchers found, of years of IRS budget shortfalls, during which agency technologists used shortcuts to design audit algorithms that were not truly race-blind.
That history is worrisome, especially if the IRS is going to wind up short on funds again in coming years, said Dorothy A. Brown, a professor at Georgetown University Law Center.
“When the IRS is put in a difficult position, they have a history of going after or creating processes that target Black Americans,” said Brown, the author of the 2021 book “The Whiteness of Wealth.” “And given the fact that most people don’t associate race and tax, we could anticipate this repeating.”
Jeff Stein contributed to this report.
