It wasn’t a good day for the tax man when U.S. lawmakers passed a bill over the weekend to keep the government open before the holidays.
Because of the law that President Joe Biden signed on Saturday, over $20 billion that was supposed to help the IRS with its long-term enforcement efforts is now frozen and can’t be used.
Since 2022, when the Inflation Reduction Act gave the IRS more money, lawmakers have gone back and forth about giving it more money to make sure people pay their taxes. The goal is to do more audits of high-income households and big companies.
The new bill that was passed over the weekend keeps the government’s funding at the same amount until March 14. The extra IRS funding was mostly given by Democrats through the Inflation Reduction Act of 2022 (IRA), but Republicans immediately opposed it and may have twisted it in some ways. The next chance to unfreeze the extra funding will be next year, but Republicans will be in charge of both the House and the Senate and Donald Trump will be in the White House.
Former IRS Commissioner Charles Rettig, who ran the agency under both Trump and Biden, said it’s “highly unlikely” that lawmakers will give the money back next year. He also said that there is a “significant chance” that the money will be taken back in full.
Rettig said, “The new majority in Congress is made up of the people who frozen these same funds during the budget talks.”
To be clear, he said that audits will still happen even if the IRS stops getting extra money from the IRA. He said that tax reports might be looked at in a “more issued-focused” and “data-driven” way.
He said that cutting money comes with a cost. “An underfunded IRS directly hurts taxpayers who follow the rules by helping people who don’t pay their taxes.” “The costs of running the U.S. don’t go away just because the IRS is hurt,” Rettig said.
Trump’s transition team has promised to stop what it calls “bureaucratic overstepping” at the IRS. Republicans in Congress have been critical of the agency’s multibillion-dollar windfall ever since Democrats included it in the tax, health, and climate legislation that came out of Biden’s Build Back Better framework in 2022.
The $20.2 billion in question is part of a pot of money set aside by the Inflation Reduction Act to fix up the IRS. The legislative deal gave the IRS an extra $80 billion to make it harder to not pay taxes and increase the number of audits. The money was also used to improve customer service and IRS technology.
As a compromise between Democrats and Republicans during talks to raise the debt ceiling in 2023, the spending was cut to about $60 billion. The $20.2 billion in question is now out of reach because of strange budget language and talks in earlier bills to keep the government running.
The IRS hasn’t used much of the money set aside for stricter regulation under the IRA so far. For good, if the $20.2 billion can’t be reached, it will cancel out the extra money the agency was hoping to get through the IRA for law enforcement.
The IRS has tried to show early enforcement results from the money it has been able to use. For example, it has received over $1 billion in back taxes from millionaires who were behind on their payments.
A spokesman for the Treasury Department told MarketWatch on Monday that the $20.2 billion in funding had not changed.
Deputy Treasury Secretary Wally Adeyemo said last month that the agency might not be able to do its job of collecting all the taxes that rich people and businesses owe but haven’t paid could have “a dramatic fall-off” without the extra police money.
He used IRS figures to show that without the $20.2 billion, there would be 8,000 fewer audits of wealthy taxpayers and businesses until 2029. As one report put it, that would make the government deficit $140 million bigger.
Because of the budget process, Joe Bishop-Henchman, executive vice president of the right-leaning National Taxpayers Union Foundation, said that the current freeze is “not the final word” on the money.
Bishop-Henchman said that Adeyemo of the Treasury Department “was putting the full force on this because he knew this was the last chance politically to get the money back to the IRS.”
During last week’s plot turns on Capitol Hill, groups calling for stricter tax enforcement said it was a very important time.
A leader of a group called Patriotic Millionaires said last week that Democrats should have insisted on the $20 billion they wanted as part of the deal to fund the government until March.
The American people, he said last Wednesday, “might just conclude that both parties agree that the wealthy should just decide for themselves how much taxes to send in, rather than being held to the same standard as regular Americans who work for a living and have taxes taken out of their pay cheques every week,”
Pope-Henchman said on Monday that people have two main ideas about how strict the IRS should be.
There are two schools of thought, he said. One says “it’s all enforcement, all the time,” and the other says “the IRS should primarily be a customer-service enterprise, that most mistakes are mistakes and the way you fix them is through clarity and good customer-service tools.”
According to Bishop-Henchman, most Republicans agree with the second option. Because of this, next year there will likely be less money for the IRS to implement the law.
