IRS funding may be slashed in debt-ceiling deal. Is that good news for taxpayers worried about audits?

By Andrew Keshner

The IRS was initially poised to receive $80 billion over a decade -- then came the debt-ceiling agreement

IRS spending plans are bumping up against the debt-ceiling negotiations.

Congress was poised to give $80 billion to the IRS over a decade in order to upgrade the tax agency's operations while stepping up enforcement against corporations and rich taxpayers.

But after giving the money last summer in a sweeping tax and climate package, lawmakers could be poised to divert one quarter of the cash from the IRS as a part of the negotiations to raise the debt ceiling.

The Fiscal Responsibility Act -- the bill stemming from the talks between President Joe Biden and House Speaker Kevin McCarthy -- pulls back almost $1.4 billion immediately earmarked for the IRS from the $80 billion sum.

Meanwhile, a side agreement redirects $20 billion toward other domestic spending, according to the Wall Street Journal

Congress has a short window to avoid a default and its potentially market-shaking consequences. By June 5, the federal government will exhaust its capacity to pay all its bills without an increase in its borrowing limit, Treasury Secretary Janet Yellen said last week.

The bill could go for a House vote as soon as Wednesday. But the longer-term consequences of less money flowing to the IRS are less clear, some observers say.

The $80 billion comes from the Inflation Reduction Act, which Democrats passed last August on party lines. No Republicans voted for the bill, and they had plenty of skepticism about the money going to the tax agency.

With the money, the IRS is trying to overhaul operations, improve customer service and build up staff to scrutinize the returns of high-net-worth taxpayers and corporations. More than half the sum, $45.6 billion, was earmarked for enforcement. The rest went to a mix of tasks, including operations support and taxpayer services.

The IRS is still sticking with its improvement plans, Deputy Treasury Secretary Wally Adeyemo tweeted Tuesday.

The targeted $1.4 billion in funding was meant to increase IRS enforcement staff, said Rep. Jason Smith, a Republican from Missouri who chairs the Ways and Means Committee.

"Our bill in this proposal eliminates that $1.4 billion for this year, which will only help safeguard working-class families that they won't see an increase of audits," Smith said at a Rules Committee hearing on the Fiscal Responsibility Act.

The IRS and Treasury Department have insisted households making less than $400,000 would not undergo more audits as a result of the funding influx.

The pulled-back money was "unfortunate" but federal workers had a lot to lose with the prospect of a default, according to the Tony Reardon, national president of the National Treasury Employees Union. The NTEU represents workers in agencies including the IRS.

Reardon said he would closely watch how the IRS manages with less money, adding he will "fight for any reprogrammed money to be replaced." Still, Reardon said he expects the IRS to have the resources it immediately needs to replenish staff and enforce the tax code.

Ahead of the 2023 tax season, the IRS hired 5,000 customer-service agents to help with the phones. The IRS was planning to hire more than 7,000 staffers for enforcement in the coming two years, according to spending plans for the $80 billion released in April

"In addition to better serving the American people, we also cannot lose sight of the fact that the extra investments in the IRS will help reduce the federal deficit, which makes it even more perplexing that Republicans demanded IRS budget cuts at all," Reardon said.

IRS Commissioner Danny Werfel told House lawmakers in April that "longstanding historical and robust analytics" point to a $6 return for every $1 invested in IRS budgets.

But Dave Kautter, a former acting IRS commissioner and Treasury Department assistant secretary for tax policy during the Trump administration, said even a smaller investment can reap a tax revenue return.

"There is a point of diminishing returns and I've said I think the IRS would be challenged, even over a 10-year period, to spend all the money it has," said Kautter, now a partner at RSM.

For now, "it's impossible to tell with what we've got" in the debt-ceiling deal and what it means for taxpayers interacting with the IRS, Kautter said.

With the information that's out there on the IRS funding cuts in the deal, Kautter said it's "impossible" to gauge what it means for taxpayers interacting with the IRS.

"It's commonly said on Capitol Hill -- and it's accurate -- that one Congress can't bind another Congress" and the latest twist for IRS money reaffirms the point, Kautter said.

It might not even be the last development for the money, he added. Looking ahead to 2024 elections, "it could be rescinded if there was a red wave and it could be increased if there is a blue wave."

It's tricky estimating how much tax revenue the IRS can bring in with $80 billion versus a smaller number, said Alex Muresianu, policy analyst at the Tax Foundation, a right-leaning think tank.

Models factor for deterrence, or, in other words, the idea that some taxpayers would be scared from testing the limits if they know there are more IRS auditors out there, he said.

More investment to scrutinize high-end returns would initially reap a return on investment, he said.

But how many people are scared straight with $80 billion in IRS funding versus another sum, is tough to know, he said. "The business of making those assessments is really, really uncertain."

(Victor Reklaitis contributed to this report.)

-Andrew Keshner

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05-31-23 0930ET

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