In August 2021, the Congressional Budget Office (CBO) delved into proposals to bolster the budget of the Internal Revenue Service (IRS) by a staggering $79.41 billion over the next decade, spanning from 2022 to 2031. According to the CBO’s optimistic estimation, such a substantial infusion of funds would supposedly lead to a remarkable increase in revenues, totaling $180.4 billion. However, many believe that given the IRS’s track record and questionable past practices, these claims must be approached with a healthy dose of skepticism.
While proponents of the increased funding argue that it would allow the IRS to enhance its operations, modernize its technology, and provide improved services to taxpayers, there is a long-standing concern about the agency’s effectiveness and efficiency. To many Americans, the IRS has been notorious for bureaucratic inefficiencies, mismanagement, and a lack of transparency, raising doubts about its ability to utilize such a massive budget increase wisely. Today, we are going to dig into what exactly this Act means for the average American.
The IRS Inflation Reduction Act of 2022: An Ambitious Boost in Funding
The IRS Inflation Reduction Act of 2022 (P.L. 117-169) marked a significant step in addressing the issue of the IRS’s underfunding. With a proposed increase of $80 billion in funding over ten years, this Act aimed to bolster the agency’s capabilities to tackle tax collection, taxpayer services, and enforcement efforts. The Act did immediately raise eyebrows, with fear from many of government overreach or even potentially draconian abuse and misuse.
That said, many argue that underfunding has been a persistent issue for the IRS. As the U.S. tax system grows more complex and taxpayer demands increase, the agency has faced mounting challenges in fulfilling its core responsibilities. As Forbes explains, an underfunded IRS struggles to provide adequate support to taxpayers, enforce tax laws effectively, and maintain robust compliance programs. Worse yet, often the first things cut from a strained IRS are the programs in place to assist taxpayers with back tax debts– timelines for settlement programs increase to near infinite (and impossible) time frames, call centers leave many calls unanswered despite taxpayers waiting hours on hold, and the systems in place to help resolve emergency collection situations (like liens and levies) are gutted. This creates a vicious cycle wherein limited resources lead to reduced efficiency, lower revenue collection, and greater frustration among taxpayers.
According to the New York Times, the Inflation Reduction Act of 2022 purported to break the cycle of IRS underfunding by injecting the agency with a substantial sum of $80 billion over ten years. The Act claimed to empower the IRS to modernize its operations, enhance its technological capabilities, and improve its services to taxpayers. However, many feel that given the IRS’s track record of mismanagement and inefficiency, skepticism looms over whether such a massive injection of funds would truly lead to the promised improvements.
While the Act emphasized the importance of enforcement in narrowing the tax gap, many question whether the IRS can effectively utilize this additional funding for enforcement purposes. Historically, the agency has faced criticism for its lackluster efforts in pursuing the highest income level, non-compliant taxpayers, often failing to hold those responsible accountable. Allocating a significant portion of the funding to strengthen enforcement may not necessarily translate into tangible results, especially if the IRS continues to grapple with organizational and operational shortcomings.
Moreover, the Act’s commitment to improving taxpayer services raises concerns about the IRS’s ability to deliver on this promise. Despite numerous attempts to upgrade its technology and streamline processes over the last few decades, the IRS has repeatedly faced challenges in providing efficient and user-friendly taxpayer services. The history of technical glitches, delayed refunds, and erroneous guidance undermines confidence in the agency’s capacity to effect substantial improvements, even with a substantial budget increase.
The Act’s ambitious plans to modernize IRS operations sound promising in theory, but in practice, the agency’s bureaucratic nature and resistance to change could hinder meaningful progress. Past attempts to implement large-scale technological upgrades within the IRS have been plagued by delays, cost overruns, and a failure to meet desired outcomes. Concerns arise when we weigh whether this time will be any different, and whether the allocated funds will truly be utilized for the intended purposes.
Given the IRS’s tendency to operate in silos and what many feel to be a lack of clear accountability, it remains unclear how this funding will be allocated and monitored effectively. Without rigorous oversight and transparency, there is a risk that the funds may be diverted to projects that do not directly address the core issues plaguing the often beleaguered agency.
What is in the IRS Inflation Reduction Act Strategic Operating Plan?
On April 5, 2023, the IRS revealed its Inflation Reduction Act Strategic Operating Plan, signaling a comprehensive effort to outline a decade of change. The plan provided detailed budget information, allocating $8.7 billion for fiscal years 2022, 2023, and 2024. The bulk of this funding was earmarked for operations support, while approximately 20% was dedicated to enforcement efforts.
The Strategic Operating Plan aimed to address some of the long-standing challenges faced by the IRS. It envisioned a modernized tax administration system that leveraged technology to improve efficiency and taxpayer experience. The plan included initiatives to enhance taxpayer services, such as online platforms for filing returns, streamlined processing of tax refunds, and improved communication channels for taxpayer inquiries.
Moreover, the plan highlighted the agency’s commitment to bolstering enforcement efforts. It outlined measures to target tax evasion, aggressive tax planning, and noncompliance more effectively. By investing in enforcement, the IRS aimed to significantly reduce the tax gap and enhance overall compliance with tax regulations.
What does the IRS Inflation Reduction Act Promise?
Enhanced Enforcement and Compliance
Proponents of increased funding for the IRS, including the Biden Administration, argue that one of the primary benefits is the potential to ramp up enforcement activities. They claim that with a larger budget, the IRS can hire more auditors, investigators, and tax experts, allegedly enabling the agency to target tax evasion more effectively. According to their optimistic view, this heightened enforcement would likely lead to increased tax compliance among taxpayers, ultimately boosting overall revenue collection.
However, skeptics question whether the IRS’s historical struggles with enforcement will truly be addressed by pouring more money into the agency. Despite past promises to crack down on rich tax evaders, the IRS has faced criticism for its inconsistent and often ineffective enforcement efforts, many of which disproportionately harm average, middle class Americans while letting the ultra-wealthy walk away unscathed. One need only to look at the audit rates by tax bracket to see what demographics are most directly, and harshly, impacted by increased IRS efforts. Doubts arise about whether the agency’s track record can be reversed simply through increased funding without addressing deeper systemic issues.
Furthermore, critics argue that the IRS’s enforcement actions have not always been equitable and fair. There have been instances of overreach and targeting certain individuals or businesses disproportionately, while others seem to evade accountability. This raises concerns about the potential for increased funding to exacerbate such disparities rather than promote a truly fair tax system.
While proponents claim that greater enforcement fosters greater trust in the tax system, skeptics point to the IRS’s history of controversies and public distrust. Scandals involving the mishandling of taxpayer information, politically motivated audits, and allegations of bias have shaken the public’s confidence in the agency’s integrity. Therefore, it remains unclear whether more robust enforcement efforts will genuinely rebuild trust or further deepen public skepticism.
Moreover, critics question whether increased enforcement alone can effectively address the complexities and loopholes that enable genuine and substantive tax evasion. The U.S. tax code is known for its intricacy and ambiguity, allowing savvy individuals and corporations to exploit loopholes legally. Many argue that meaningful tax reform and simplification are necessary to address these issues comprehensively, rather than relying solely on enforcement measures or additional money.
The Promise of Improved Taxpayer Services
Proponents like Former IRS Commissioner Fred Goldberg say that with a larger budget, the IRS can enhance taxpayer services and support. Investing in technology and staff training would enable the agency to streamline tax filing processes, reduce processing times, and provide more accurate guidance to taxpayers. As a result, they claim, taxpayers may find it easier to comply with tax regulations, leading to a smoother and more efficient tax system.
By providing accessible and user-friendly services, it is argued that the IRS can alleviate the burden on taxpayers and enhance voluntary compliance. Whether this pans out in practice, however, is what leaves many questioning.
Reduced Tax Gap
The “tax gap” refers to the difference between the amount of tax owed and the amount of tax actually collected. According to the IRS, the annual tax gap is estimated to be hundreds of billions of dollars. A narrower tax gap has far-reaching implications for the economy. With higher tax revenues, the government can fund essential public services, invest in infrastructure, and support social programs. Additionally, narrowing the tax gap can reduce the need for additional borrowing and alleviate fiscal pressures.
Thus, it is claimed that by increasing funding and enforcement efforts, the IRS can narrow this gap significantly, contributing to increased government revenue without the need for raising tax rates. In this worldview, the $80 billion expenditure is, effectively, neutralized by the taxes collected that otherwise would not have been. Many remain skeptical of these claims and have put forward concerns about actual solvency on behalf of the government.
What are the challenges to the IRS Inflation Reduction Act?
Impact of the Fiscal Responsibility Act of 2023
Despite the initial promise of increased funding, the Fiscal Responsibility Act of 2023, passed on June 3, 2023, dealt a blow to the IRS’s budget. To avoid a U.S. default, the Act cut IRS funding, reducing the $80 billion allocated by the Inflation Reduction Act by $21.39 billion. This sudden reduction poses challenges for the IRS in executing its strategic operating plan as intended previously.
The Fiscal Responsibility Act highlights the importance of stable and predictable funding for the IRS. Budget fluctuations can disrupt long-term planning and hinder the implementation of critical initiatives outlined in the Strategic Operating Plan. For the IRS to achieve its goals, it claims, it requires consistent support from policymakers.
Potential Budget Shortfalls and IRS Operations
The debt deal’s impact on the IRS funding raises serious concerns for many on both sides of the aisle. Not only did it reduce the mandatory funding allocated by the Inflation Reduction Act, but it also slashed the IRS’s annual appropriations for fiscal year 2024 by a substantial $1.1 billion. As a consequence, many claim that the agency may be faced with crippling budget shortfalls that hinder its ability to execute the programs and initiatives outlined in its strategic plan. These funding cuts have the potential to disrupt ongoing projects and significantly delay the achievement of intended outcomes.
Budget shortfalls are a cause for alarm for all Americans as they can severely impact the IRS’s day-to-day operations, specifically the agency’s programs that interface with average taxpayers most often. With reduced resources, staffing and training efforts are likely to suffer, leading to a decline in productivity and a potential loss of institutional knowledge. As a result, the agency may struggle to achieve the level of service quality expected from a critical government institution that so many Americans are made to deal with, like the IRS.
Furthermore, the budget constraints imposed by the debt deal may impede the IRS’s efforts to modernize its systems and improve service delivery. Technological advancements are essential for the agency to keep pace with the evolving tax landscape and enhance taxpayer experience. However, with limited funding, many argue that the IRS may find it difficult to invest in much-needed technology upgrades, hindering its ability to effectively serve the taxpayers it is meant to support.
The reduction in mandatory funding and annual appropriations, specifically targeted at enforcement, poses a significant impact on the IRS’s claimed efforts in combating tax evasion and noncompliance. The IRS may be forced to scale back its enforcement operations, but also regular taxpayers may find other stressors like increased wait times on calls or for refunds.
While proponents champion the potential benefits of increased funding for the IRS, a skeptical perspective, like that of House Ways and Means Committee Member Jason Smith, highlights the challenges that may impede the agency’s long-term sustainability and strategic objectives. Strengthening enforcement, improving taxpayer services, and reducing the tax gap are potentially worthy goals, but they require a comprehensive and sustainable approach. The recent funding fluctuations, as exemplified by the Fiscal Responsibility Act of 2023, underscore the need for careful consideration and effective oversight to ensure that the IRS can navigate uncertainties and effectively fulfill its mission in service of the government, taxpayers, and the overall economy.
The fact is that the IRS must address its historical shortcomings, demonstrate transparency and accountability, and implement comprehensive reforms to ensure that this funding is utilized effectively. Rigorous oversight and a commitment to long-term sustainability are crucial to fulfill the promises of improved taxpayer services, enforcement efforts, and a reduced tax gap. Only with prudent management and genuine reform can the IRS regain public trust and effectively serve the government, taxpayers, and the broader economy.