IRS-Related Funding in the Inflation Reduction Act

IRS-Related Funding in the Inflation Reduction Act

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INSIGHTi

IRS-Related Funding in the Inflation
Reduction Act
Updated October 20, 2022
Part 3 of Title I, Subtitle A of P.L. 117-169, commonly referred to as the Inflation Reduction Act (IRA),
appropriated to the Internal Revenue Service (IRS) and related agencies a total of $79.6 billion to remain
available through the end of FY2031 to bolster taxpayer services and enforcement of the tax code, among
other purposes. The law intended this new spending to supplement, not replace, the IRS’s normal annual
appropriations (see Figure 1).
Figure 1. The IRS’s Budget Authority Through FY2031 Under the Inflation Reduction Act

Source: Congressional Budget Office; Part 3 of Title I, Subtitle A of the Inflation Reduction Act.
Notes: Prior projection is for FY2022-FY2031. Assumes no change in base appropriations.
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IRS Appropriations
Enforcement
The IRA gave the IRS $45.6 billion for tax enforcement activities such as hiring more enforcement
agents, providing legal support, and investing in “investigative technology.” The funds can also be used to
monitor and enforce taxes on digital assets such as cryptocurrency. P.L. 117-58, the Infrastructure
Investment and Jobs Act, required cryptocurrency brokers to report more information on their clients’
trading activity to the IRS starting in 2023. (The law also appropriated $153 million to the United States
Tax Court.)
Supporters argue these funds will reduce the “tax gap,” or the average annual value of unpaid federal
taxes. The IRS estimates the tax gap averaged $381 billion after accounting for enforcement between
2011 and 2013, the most recent years available. Some argue the 19% decline in the IRS’s inflation-
adjusted (CPI-RS) funding between 2010 and 2019 facilitated tax evasion. Funding rose in 2020 and
2021, in large part to help the IRS administer COVID-19-related benefits. (For more on the tax gap, see
CRS In Focus IF11887, Federal Tax Gap: Size, Contributing Factors, and the Debate Over Reducing It.)
The Congressional Budget Office estimates that the additional enforcement measures funded by this law
will generate $204 billion in revenues through FY2031, although such estimates are highly uncertain.
Operations Support
The IRS received $25.3 billion for operations support from the IRA. This funding covers routine costs
such as rent, facilities, printing, postage, and security, as well as telecom and information technology.
These funds can also go toward research and the IRS Oversight Board, which is meant to oversee and
guide the IRS but has suspended operations due to a lack of quorum.
Taxpayer Services
The IRA appropriated $3.2 billion for taxpayer services such as filing and account services, prefiling
assistance, and education. The IRS has struggled to provide quality service during the COVID-19
pandemic. The number of unprocessed tax returns at the end of the filing season rose from 7.4 million in
2019 to 35.8 million in 2021 and 13.3 million in 2022. Phone service also suffered. Whereas IRS
customer service representatives answered 59% of phone calls they received in 2019, they answered 19%
and 18% in 2021 and 2022, respectively.
In addition, the IRS received $15 million under the IRA to fund a task force that will study the cost and
feasibility of creating a free direct e-file program. The agency previously committed not to create its own
tax filing software as part of an alliance called the Free File Program. In exchange, private tax filing
software companies agreed to provide free services to low- and moderate-income taxpayers. Roughly 4%
of eligible taxpayers used the Free File Program’s private providers to file their taxes in 2020. Intuit and
H&R Block, who previously represented two-thirds of the program’s usage, both left the agreement in the
past three years. (For more on the Free File Program, see CRS In Focus IF11808, The Internal Revenue
Service’s Free File Program (FFP): Current Status and Policy Issues.)

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Business System Modernization
The IRS also received $4.8 billion for its Business Systems Modernization project from this law. In 2019,
the IRS released a plan to upgrade the business systems it uses to administer taxpayer services,
operations, and cybersecurity. These additional funds can be invested in customer service technology,
such as automated callback systems for phone lines, but not used to operate legacy systems.
Oversight
The IRA gave other Treasury offices $557.5 million to oversee the administration of these new IRS funds.
Of that amount, $403 million went to the independent Treasury Inspector General for Tax Administration
(TIGTA), $104.5 million went to the Office of Tax Policy, and $50 million went to the Treasury
Departmental Offices.

Author Information

Brendan McDermott

Analyst in Public Finance

Disclaimer
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