Taxpayer Relief: New Spending Deal Averts Government Shutdown, Trims IRS Enforcement Funds

Congressional leaders and the White House have struck a deal to avert a partial government shutdown. The Further Consolidated Appropriations Act, 2024, a.k.a. the “minibus,” includes a $20.2 billion rescission of the funding provided to the Internal Revenue Service (IRS) by the Inflation Reduction Act (IRA).

IRA gave the IRS an $80 billion funding boost over ten years. Instead of prioritizing urgently needed taxpayer service or modernization needs, most of this funding is dedicated for enforcement. This means more IRS agents, audits, and further intrusions into taxpayers' privacy and financial affairs. Over the past several years, the Biden administration and the IRS have advanced policies and proposals to weaken protections from tax penalties being used as a bargaining chip against taxpayers, require financial institutions to provide the IRS with information on all accounts with over $600 in gross activity, and imposed the American Rescue Plan Act's impossible-to-administer $600 threshold for reporting 1099-K transactions.

Some may fret that the IRS budget rescission will increase the deficit. The enforcement boost was included in IRA as a revenue raiser to pay for the trillions in new spending enacted in that law. However, CBO itself noted points of uncertainty in its original estimate of the new tax revenues that might be gained through the funding provided for enforcement:

The change in revenues resulting from the proposed increase in the IRS’s funding could be different from CBO’s estimate. It would depend on a number of factors, including the IRS’s ability to hire the appropriate personnel, the composition and productivity of the additional audits and other enforcement actions undertaken by the IRS, changes in taxpayers’ behavior in response to greater IRS enforcement, and the effect of increased IRS spending in areas other than enforcement (such as technology).

Given lingering inflationary pressures and challenges finding, hiring, and training a skilled cadre of auditors and investigators, the IRS may have a hard time achieving its hiring and enforcement goals. Additionally, the success of an audit by the IRS is not guaranteed. Recent reviews of IRS audits within sections focusing on high-income businesses and partnerships have noted a high rate of “no change” in the amount owed from the audited taxpayer's initial position.

Taxpayers would be better off with an IRS focused on taxpayer services and not on heavy-handed enforcement. Any lawmakers concerned that a rescission of this funding would boost the deficit should look for additional offsets throughout the bloated federal bureaucracy.