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TIGTA: Clawbacks, Flat Funding Could Hinder IRS Transformation


Interview with Darren Guillot, Former IRS Deputy Commissioner of the Small Business Division; alliantgroup National Director

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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Fiscal Responsibility Act of 2023 (H.R. 3746) — immediately clawed back $1.4 billion, with another $10 billion to be rescinded in both fiscal 2024 and fiscal 2025.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.


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.

Darren Guillot | Former IRS Deputy Commissioner of the Small Business Division; Former Acting Commissioner Small Business Self Employed Division; alliantgroup National Director
If the IRS receives less funding it will have to forgo some of its plans or at least delay them,” according to Darren Guillot of Alliantgroup LP, who retired from the IRS in September 2023 as a deputy commissioner overseeing collection.

David Kautter of RSM US LLP told Tax Notes in an email that in establishing spending plans for the IRA funds, the IRS assumed they would be used to support transformation efforts, while day-to-day operations would continue to be supported by the annual appropriation process.

“That clearly has not been the case so far and it is unlikely that the IRS will get all the annual appropriations it has been hoping for in the future,” said Kautter, a former acting IRS commissioner and a member of Tax Analysts’ board of directors. “Given the reduction in the IRA funds agreed to as part of the debt limit negotiations and the reduction in annual appropriation amounts last year and so far this year, it will be critical for the IRS to constantly reexamine its priorities, especially with respect to its systems modernization efforts, now and going forward.”

The rescission’s impact is “absolutely a concern to anyone who cares about a tax system that serves the American people well,” Jon Whiten of the Institute on Taxation and Economic Policy told Tax Notes. “By further cutting or flat-funding appropriations, lawmakers are making it harder for us to have the well-functioning tax system that we all deserve.”

But Pete Sepp of the National Taxpayers Union said that while $818 million isn’t a pittance, it’s also not an impossible mountain to climb for reprogramming.

Assuming the $818 million shortfall is in current services, Sepp suggested that “the enforcement funding under IRA could be shifted toward these items, many of which can arguably serve compliance anyway.” “Nonetheless, a realistic, detailed conversation between the IRS and Congress on how appropriations and IRA money are expected to interact in years ahead, and how that money should be directed, would be far more helpful in the long term to making sure this effort to change the Service doesn’t crash and burn,” Sepp said.

Taxpayer Services

There has been concern within the tax community that the IRS’s additional funding for taxpayer services will run out too quickly.

In its strategic operating plan, the IRS said that if its appropriated funding levels for fiscal 2023 weren’t increased, it likely would deplete its taxpayer services funds in less than four years. According to the TIGTA report, nearly $890 million of the $3.2 billion allocated for taxpayer services was spent in fiscal 2023.

Sepp said he thinks the taxpayer services funding could run out even faster.

“The funding will not be a linear curve, it will likely get a little steeper from here on out, even as funding to ease things like temporary processing backlogs becomes less necessary,” Sepp said.

Featured Leadership

Darren Guillot | Former IRS Deputy Commissioner of the Small Business Division; Former Acting Commissioner Small Business Self Employed Division; alliantgroup National Director

As an alliantgroup trusted tax advisor and consultant, Mr. Guillot helps small and medium-sized businesses navigate America’s tax system to secure incentives and credits that stimulate innovation and improve products and services. He also serves them as an expert resource resolving complex compliance and appellate controversies.

Mr. Guillot recently retired from IRS after 36 years with the agency. From 2019 – 2023 he served as Deputy Commissioner of the IRS’ Small Business/Self Employed Division, overseeing all IRS domestic and international Collection Operations and its Operations Support functions.