IRS Risks Losing Access to $20 Billion in Tax Enforcement Funds

The Internal Revenue Service (IRS) building in Washington on June 28, 2023. Madalina Vasiliu/The Epoch Times

The Internal Revenue Service (IRS) faces a $20 billion funding gap for its tax enforcement activities due to what U.S. Treasury officials on Tuesday described as a legislative anomaly linked to a prior budget deal.

Treasury Deputy Secretary Wally Adeyemo said on a Nov. 26 call with reporters that the latest September stopgap funding bill that is keeping the U.S. government funded through Dec. 20 inadvertently duplicated a one-time $20 billion cut to IRS enforcement funding previously agreed upon in bipartisan negotiations on Capitol Hill.

Adeyemo urged lawmakers to reverse the second, inadvertent $20 billion cut, and unlock the frozen funds. He warned that otherwise there would be thousands of fewer audits of wealthy individuals and large corporations, that the IRS would have to freeze hiring, and that the loss of the money would increase the national deficit by $140 billion.

“The IRS is going to potentially have to make dramatic decisions about stopping hiring and starting to budget for a world in which they don’t have $20 billion, which will stop a lot of their progress,” Adeyemo said. ”If they don’t get that $20 billion that is at risk they would run out of enforcement money at the current pace sometime in fiscal year 2025.”

Maya MacGuineas, president of Committee for a Responsible Federal Budget (CRFB), joined Adeyemo on the call. She echoed his warning, saying that cutting enforcement funding could have a negative impact on the federal deficit and add to the ballooning of the national debt, which recently hit $36 trillion.

“Given the fiscal situation we deeply hope there is no backsliding in the coming months and years with rescinding, diverting, repealing any of the revenue that is going effectively into the IRS to help with tax collection,” MacGuineas said on the call.

The IRS originally received $80 billion under the 2022 Inflation Reduction Act to enhance the tax agency’s enforcement capabilities, modernize aging technology, and improve taxpayer services. Of that, roughly $46 billion was earmarked for enforcement, the most controversial part of the package, which was opposed by some Republican lawmakers on grounds that it risked increasing tax audits on lower- and middle-income Americans.

A 2023 agreement on the debt ceiling and budget cuts between Republicans and the White House led to the rescission of $1.4 billion from the IRS, along with a separate plan to redirect $20 billion of IRS funding over two years to other nondefense programs.

However, a budgetary anomaly included in September’s continuing resolution (CR) that kept the government funded through the end of December inadvertently duplicated the $20 billion cut. This means that unless Congress reaches a comprehensive spending deal for the remainder of fiscal year 2025 or explicitly includes language in another continuing resolution that addresses the duplication, the IRS faces a second $20 billion cut.

“If you live in the CR world all year, then you lose the $20 billion,“ Adeyemo said. ”If you have an omnibus and the omnibus doesn’t say anything about this, then the $20 billion is restored.”

Failing any kind of remedy, Adeyemo said, the IRS will run out of enforcement funding in fiscal year 2025 and exhaust taxpayer services funding the following year.

“If, at this moment, they’re forced to pause or stop because they don’t have certainty about the future, it will mean that they’re not able to meet their goals in terms of hiring, and it will make it harder for them to do the audits they need to bring in that revenue,” he said.

Adeyemo added that, besides a hiring freeze at the IRS, the looming $20 billion funding cut also would likely increase staff attrition.