As Congress negotiates a bill for federal funding during the lame-duck session, lawmakers would be wise to remember that stripping funds from the Internal Revenue Service costs more than it saves. On the table in the appropriations bill is a $20 billion recission of funds to the nation’s tax administration. While this may look like a spending cut, it will increase deficits by $46 billion due to a drop in the agency’s capacity to enforce taxes on wealthy individuals owed under existing federal law.
At the same time, congressional Republicans are calling on the incoming Trump administration to end the popular program that allows taxpayers to file their returns for free directly through the IRS. This will ultimately lead to more costs for taxpayers as they pay private services such as Intuit or H&R Block to carry out paperwork that they are required by law to file each year.
Regular taxpayers benefit from a competent and well-funded IRS. Most people do their best to pay their taxes accurately and on time, and slashes to funding that leave the agency understaffed and underequipped only create headaches for compliant taxpayers. Until recently, the IRS was not given the funding and capacity to pursue the high-income taxpayers who have the most complex returns but who also account for a hugely disproportionate share of the tax avoidance, which unfairly shifted the agency’s scrutiny to everyone else.
The arguments against an improved IRS are motivated by private corporations worried about their profit margins and by anti-government activists seeking to undermine the public’s trust in the agency.
Upcoming Appropriations Bill Will Cut Billions from the Agency if Congress Does Not Act
Congress must appropriate funding to each federal agency every year, even when that funding has already been authorized through prior legislation. When Congress cannot come to an agreement on funding levels, they frequently pass “continuing resolutions,” which generally keep funding at its current level to prevent a government shutdown.
To help rebuild the agency after a decade of cuts in its annual appropriations, Congress provided an additional $80 billion in the Inflation Reduction Act to supplement its annual appropriations for 10 years. Most of this money is for tax enforcement targeting profitable corporations and the wealthy. That was unpopular among congressional Republicans, who sought to eliminate the additional funding during 2023’s debt ceiling negotiations.
Filing tax returns is required by federal law, and taxpayers should not need to pay money to a private company to hand over their private information to complete the service for them.
U.S. President Joe Biden signed the IRA into law but shortly after compromised with then-Speaker Kevin McCarthy (R-Calif.) and agreed to rescind $20 billion in funds over the upcoming two years as part of a deal to prevent the Republican-controlled House from driving the United States to default on its debts. The provision to cut those funds was included in the next year’s spending bill, negotiated between Republican and Democratic lawmakers. But rather than spreading the cuts over two years, all $20 billion was included in the first year—fiscal year 2024.
Now, Congress is likely to pass a continuing resolution that would extend funding levels from 2024. Without an agreement between lawmakers, this would include an additional $20 billion funding cut to the IRS that was not included in the initial Biden and McCarthy agreement.
This is bad for the federal deficit and bad for average taxpayers.
Congressional Republicans Also Want to Make it More Expensive to File Tax Returns
This year, for the first time ever, many taxpayers were able to file their taxes for free directly through the IRS as part of the Direct File pilot program. In past years, taxpayers were forced to either file by hand themselves or to use paid tax preparers like TurboTax, H&R Block, or Jackson Hewitt.
Taxpayers who used the Direct File program (which was only available in 12 states during its first year) were pleased with the results. The pilot program exceeded its goal for the number of users, and 90% of users rated their experience with the program as excellent or above average.
State governments were excited about the opportunity as well. Thirteen additional states are cooperating with the IRS to expand Direct File to include their state income taxes.
It makes sense. Filing tax returns is required by federal law, and taxpayers should not need to pay money to a private company to hand over their private information to complete the service for them.
But that is exactly what many congressional Republicans are now asking the incoming Trump administration to require of honest taxpayers. Twenty-nine Republican lawmakers signed a letter to the incoming administration asking them to end the popular program on “day one.”
Previously, the IRS attempted to persuade private companies to offer free filing services for taxpayers with relatively simple returns through a program called the Free File Alliance, and the companies participated for some time. But this arrangement did not always go as planned.
Some companies hid the free services from search engine results, and in TurboTax’s case, their parent company Intuit was eventually sued for deceptively leading taxpayers into paid services rather than the free services. Intuit eventually settled for $141 million.
Decade of Austerity Diminished the IRS’ Ability to Serve its Mission
Between 2010 and 2021, the agency’s budget was cut by a fifth and the number of revenue agents dropped by 35%. Meanwhile, the amount of tax returns filed grew by 13%, and the amount of tax returns filed by individuals making more than $500,000 grew by 70% from 2011 to 2019. As a result, the audit rate on these wealthy individuals dropped by more than 76%.
Although the IRS budget cuts were part of a larger campaign of government austerity following the Great Recession, the cuts put the federal budget in a worse position. The gap between the taxes that people legally owed and what they actually paid grew as high as $600 billion annually by 2021, more than half of that due to unpaid taxes from the top 5% of income earners.
Every hour spent auditing the returns of the most well-off families found $13,000 in unpaid taxes.
It wasn’t just the country’s fiscal situation that suffered from the assault on the IRS. Regular taxpayers trying to file accurate and timely tax returns found themselves dealing with an agency unable to meet the needs of the public. In 2022, The Washington Post reported on outdated and understaffed IRS processing facilities. IRS employees were in many cases using 70s-era technology and business processes. The Austin, Texas facility was so strained that its cafeteria became an impromptu document storage room.
The result was that the agency was failing. It was simply unable to answer calls, respond to letters, and issue swift tax refunds.
Recent Improvements to the IRS are Delivering Immediate Results for Taxpayers
The Inflation Reduction Act passed in 2022 reversed the decades of funding cuts to the IRS. The bill allocated $80 billion (now reduced to $60 billion and potentially even further) in funding to the agency to return its workforce to adequate levels, modernize its business systems and technology, and increase tax enforcement on big businesses and people making more than $400,000 a year.
The results were immediate. In prior years, the IRS had satisfactorily answered just 15% of phone calls. In 2023—the first tax year with the new funding—they answered 85%. That’s still too low by most standards, but a remarkable improvement. The agency also opened or re-opened 54 in-person centers to assist taxpayers across the country.
Positive Results for the Federal Budget, Too
The improvements to the IRS have delivered progress toward closing the tax gap as well. In 2023, the agency released a comprehensive strategic operating plan. In addition to improving taxpayer services, the document laid out the agency’s strategy for increasing audit rates on high-income individuals and complex business structures. While it may only take one auditor a few hours to review the tax return of a family claiming the Child Tax Credit, dissecting the tax return of a large S-corporation could be a years-long project for an entire team of auditors. So, the first step was to hire highly-skilled staffers and provide them with the best training and technology available.
This year, the IRS announced that it had collected $1.3 billion in unpaid taxes from millionaire households. In many cases, these were individuals simply not even bothering to file their tax returns. The agency had also begun leveraging modern technology like artificial intelligence to identify the most suspicious returns from large, complex partnerships.
If these funding cuts are passed, there will be thousands of fewer audits of wealthy individuals and large corporations. The latest estimates from the Congressional Budget Office show that an additional $20 billion recission in IRS funds will result in $66 billion in lost revenue, creating a $46 billion rise in deficits. That estimate tracks with a recent Government Accountability Office report that found every hour spent auditing the returns of the most well-off families found $13,000 in unpaid taxes. Cutting this funding is costly, not just for the honest taxpayers who will spend more hours waiting on the phone, but with direct increases in the federal deficit.
