How Might the Internal Revenue Service Use $78.9 Billion in Mandatory Funding?

INSIGHTi
How Might the Internal Revenue Service Use
$78.9 Billion in Mandatory Funding?
November 17, 2022
The law commonly referred to as the Inflation Reduction Act (IRA, P.L. 117-169) provides the Internal
Revenue Service (IRS) a total of $79.6 bil ion in mandatory funds, most of which are available for
obligation until September 30, 2031. These funds are in addition to the IRS’s annual appropriations
during that period. This marks the first time that Congress has approved multiyear funding for the service.
The IRA specified that $78.9 bil ion should be distributed among the IRS’s four appropriation’s accounts,
as follows:
 $45.6 bil ion to expand enforcement activities;
 $25.3 bil ion to acquire and operate information technologies (ITs) to support critical
functions;
 $4.8 bil ion to accelerate the modernization of IRS’s business systems; and
 $3.2 bil ion to improve taxpayer services.
The remaining $700 mil ion is for activities broadly related to the IRS’s use of the mandatory funds:
 $15 mil ion (until September 30, 2023) for an IRS task force to develop an estimate of
the cost of options for implementing a free direct filing option through a secure IRS web
portal for al taxpayers, with input from taxpayers and experts;
 $403 mil ion (until September 30, 2031) for the Treasury Inspector General for Tax
Administration;
 $104.5 mil ion (until September 30, 2031) for the Treasury Department’s Office of Tax
Policy;
 $153 mil ion (until September 30, 2031) for the U.S. Tax Court; and
 $50 mil ion for other Treasury Department offices involved in implementing IRA’s
provisions.
The IRA funding for the IRS has the potential to substantial y boost its annual budget through FY2031,
depending on when the money is obligated. In FY2022, for instance, the IRS received $12.6 bil ion in
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appropriations. If 10% of the mandatory IRA funding had been available for obligation that year, the IRS
budget would have been 63% larger.
Rationale for Mandatory Funding for the IRS
The IRA funding for the IRS effectively implements key elements of an IRS funding proposal set forth in
a May 2021 report by the Treasury Department on ways to improve taxpayer compliance. Among other
things, the report cal ed for providing the IRS with sufficient resources to substantial y reduce the federal
tax gap, which is the difference between the total amount of federal taxes owed and the total amount of
those taxes paid on time. According to the IRS’s latest estimate of the gross gap, it averaged $496 bil ion
between FY2014 and FY2016.
The rationale for Treasury’s funding proposal was partly grounded in several trends since the mid-2010s
that have stirred broad concern that the IRS was not doing what it needed to fairly and efficiently
administer the federal tax code. Largely because of a hiring freeze from FY2011 to FY2018 and a wave of
retirements, the IRS’s full-time-equivalent workforce decreased by 17% between FY2010 and FY2021,
including a 30.5% drop in IRS examination and collection employees. During the same period, the IRS’s
budget, measured in 2010 dollars, fel by 11%. These decreases contributed to declines in enforcement
and taxpayer services. The audit rate for persons with $1 mil ion or more in income dropped from 8.1% in
FY2011 to 0.8% in FY2019, and 18.5% of taxpayer cal s to speak with a customer service representative
were successful in FY2021. Additional y, IRS’s backlog of unprocessed individual tax returns reached
historical y high levels during the 2021 and 2022 filing seasons.
Debate over How the IRS Should Spend the $78.9 Billion in Mandatory
Funding
In mid-August 2022, Treasury Secretary Janet Yel en directed the IRS to produce a plan by mid-February
2023 for spending the $78.9 bil ion in mandatory funding; she specified that the plan should focus on
preventing large unprocessed tax return backlogs, hiring new employees, improving taxpayer service, and
technology modernization.
Secretary Yel en’s message highlights a key question: how should the IRS spend the mandatory funds? As
the rationale for such a large investment in the IRS suggests, there are several possible urgent uses. A key
chal enge facing IRS senior managers is how to distribute the funds among those uses. Perhaps the most
important decision is how to apportion the money among taxpayer service improvements, information
technology implementation, and enforcement enhancements. Secretary Yel en’s directive suggests that
she assigns a higher priority to using the mandatory funds to improve IRS’s taxpayer services and
information systems than to greatly increasing enforcement. Some proponents of the mandatory funding
disagree because they think that shrinking the federal tax gap should be the IRS’s top priority.
The IRS can invest substantial amounts of money at the same time in taxpayer assistance, technology
improvement, and enforcement. Senator Ron Wyden articulated such a view in a letter dated October 4,
2022, to Secretary Yel en and then-IRS Commissioner Charles Rettig. Senator Wyden stated that he
expected the money to be invested in (1) al owing the IRS to process returns and letters of
correspondence and respond to taxpayer phone cal s for assistance with no long delays; (2) upgrading its
information technology to complete audits faster and better detect tax evasion; and (3) increasing the
IRS’s resources for auditing the returns of high-income individuals and partnerships at higher rates than
the audit rate for claimants of the earned income tax credit; cracking down on offshore tax evasion;
reducing the federal tax gap; and rebuilding the investigative capacity of IRS’s Criminal Investigation
Division, whose workforce declined by about 25% from FY2010 to FY2021.

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Not al lawmakers support the mandatory funding provided by the IRA. Critics have expressed concern
about what they see as the implications of the substantial boost in enforcement spending specified in the
act. In their view, the increase could enable the IRS to hire tens of thousands of examination and
collection agents who would be tasked with collecting unpaid taxes owed by middle-income taxpayers,
including a large number of smal business owners, using strong-armed tactics if necessary. Critics
contend that such actions would be done without a mechanism in place that subjects them to adequate
accountability and transparency. Both Secretary Yel en and the IRS Commissioner have publicly pledged
not to use the mandatory funding to increase the audit rate for taxpayers with less than $400,000 in
income, as of IRA’s date of enactment.


Author Information

Gary Guenther

Analyst in Public Finance




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