A clawback of the IRS’s Inflation Reduction Act funds, combined with flat appropriations funding, could hamper the agency’s plans for transformation, according to a new report.
The IRS spent $3.5 billion of its IRA funding last year, but almost $2 billion of that amount was used to augment its fiscal 2023 appropriations, the Treasury Inspector General for Tax Administration said in a report released January 31.
The IRA included nearly $80 billion in supplemental funding for the IRS to spend through September 30, 2031 — $45.6 billion allocated for enforcement, $3.2 billion for taxpayer services, $25.3 billion for operations support, and $4.8 billion for business systems modernization.
It was a welcome infusion for an agency that has seen its budget cut for years, but congressional Republicans have made it their mission to recoup the supplemental funding.
The debt limit agreement — the Fiscal Responsibility Act of 2023 (H.R. 3746) — immediately clawed back $1.4 billion, with another $10 billion to be rescinded in both fiscal 2024 and fiscal 2025.
According to IRS officials, the $1.4 billion rescission reduced its funding for enforcement from $45.6 billion to about $44.2 billion. TIGTA notes that the IRA doesn’t allow transfers between funding activities — for example, funds allocated for enforcement can’t be used for taxpayer services.
In fiscal 2023, the IRS spent $299 million of its enforcement funding, $890 million of its taxpayer services funding, $1.5 billion of its operations support funding, and $767 million of its business systems modernization funding, according to the report, dated January 29.
Impacts
TIGTA said the rescission will affect the IRS’s plans for transformation laid out in its strategic operating plan. While the clawed-back funding is expected to alter the agency’s enforcement efforts to reduce the tax gap, TIGTA said that because the enforcement funds are designated to help the IRS complete other activities in the plan — including implementing the IRA’s energy security provisions — “it is possible that the other objectives will see adjustments due to the rescission.”
Regarding the $20 billion cut, the report said that “according to IRS officials, a decision has not been reached on which funding activities this will impact.”
Meanwhile, the IRS has budgeted almost $2 billion of the IRA funds to supplement its fiscal 2023 appropriation because the “amount the IRS received was insufficient to cover normal operating expenses and did not include adjustments to account for inflation,” the report said. IRS officials estimate the agency will need “$818 million more for its FY 2024 annual appropriation than it received in FY 2023 just to maintain its current services,” the report said.
