IRS Chief Warns Less Funding Will Fuel Budget Deficits

Internal Revenue Service (IRS) Commissioner nominee Daniel Werfel testifies before the Senate Finance Committee during his nomination hearing in Washington on Feb. 15, 2023. (Kevin Dietsch/Getty Images)

IRS Commissioner Danny Werfel warned lawmakers that reducing the tax-collecting agency’s budget will add to the growing federal deficit and undo many of its service improvements.

At a House Ways and Means Committee hearing on Feb. 15, Mr. Werfel defended the IRS’s budget increase, cautioning that clawing back these funds would undermine efforts to generate revenue for the U.S. government and bolster customer service support for taxpayers.

“For every $100 million taken from the IRS, the deficit grows by $600 million over 10 years,” he stated.

He also said that less IRS funding makes it easier for people to cheat on their taxes.

He identified how much the IRS achieves with $100 million, including 700 audits of high-income taxpayers, 200 audits of “complex partnerships,” 100 audits of large corporations, and 32,000 collection cases.

“And that’s just from the $100 million, so clearly it has an impact,” Mr. Werfel said.

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The federal government is expected to run a budget shortfall of $1.6 trillion for fiscal 2024 and $1.8 trillion in fiscal 2025, according to the Congressional Budget Office (CBO). Over the next decade, Washington is poised to record about $20 trillion in cumulative deficits, the CBO noted in its latest 2024–2034 outlook.

The nonpartisan watchdog adjusted its 2024–2033 revenue projections downward by $3 billion, a reduction that largely accounted “for a provision of the FRA [Fiscal Responsibility Act] that rescinded funds provided to the Internal Revenue Service (IRS) for tax enforcement and related activities.”

As part of the Inflation Reduction Act, the organization was granted an $80 billion infusion over a decade. However, President Joe Biden trimmed the funding by $20 billion as part of the debt ceiling agreement, also known as the FRA, with former House Speaker Kevin McCarthy.

The challenge for the IRS is that the clawbacks, which were agreed to as part of a handshake deal between President Biden and Mr. McCarthy, were taken out of its regular appropriations budget, making its base budget “insufficient to run the daily train schedule,” Mr. Werfel said.

“What that means is that we have to borrow from the modernization funding just to keep the lights on,” he said. “And if we keep doing that, we won’t modernize.”

Funding and Revenues

A recent Government Accountability Office report estimated that about 4 percent, or $3.5 billion, of the original $80 billion funding increase given to the IRS had been spent. Most of the new spending had been allocated toward IT programs, operations support, and enforcement.

In a new paper, titled “Return on Investment: Re-Examining Revenue Estimates for IRS Funding,” the federal agency presented the case that the new funding from the Inflation Reduction Act would generate substantial revenues for the U.S. government, adding that previous estimates “did not present a complete picture of the revenue benefits of the innovative investments.”

“The approach ignored many activities that will influence revenue, including enhanc­ing services to improve voluntary compliance, modernizing technology, and adopting analytic advances that can dramati­cally improve productivity,” the paper reads. “It also ignored the deterrence effect of compliance activities on taxpayers’ behavior.”

The Treasury projected that the new funding would expand revenues by as much as $561 billion by 2034.

House Democrats, including Rep. Lloyd Doggett (D-Texas), championed this message, accusing Republicans of wanting to “cut the very funding” the IRS needs to ensure “corporate and high wealth tax cheats are treated the same way and pay their taxes the way most Americans do.”

However, Ways and Means Committee Chair Jason Smith (R-Mo.) called the optimistic revenue generation forecasts “fantasyland claims” and urged the IRS to dedicate its time and resources “toward improving its customer service for its existing duties.”

A sign outside the IRS building in Washington on May 4, 2021. (AP Photo/Patrick Semansky, File)

No Budget Yet

The current administration has been proposing or enacting a series of tools to help raise more revenue and plug the gaping hole in the federal budget that has exacerbated the $34.2 trillion national debt.

Last year, President Biden outlined $4.7 trillion in tax increases for individuals and businesses. It remains unclear what the White House plans to unveil during budget season. Officials have hinted at a billionaire minimum tax of 25 percent that would raise an estimated $440 billion over the next 10 years.

“Imagine what we could do if we just made billionaires pay their taxes like everyone else,” President Biden’s social media communications team posted on social media platform X in December.

Meanwhile, Republicans blasted the administration for delaying the fiscal 2025 budget proposal until March 11, 35 days after the deadline. This would be the third straight year that President Biden has been late in delivering a spending plan.

“Based on what the President presented Americans with last year, the House Budget Committee is not optimistic about what Biden’s FY2025 budget will look like—once the President gets around to proposing one to Congress,” the GOP-led House Budget Committee said in a statement. “The House Budget Committee will continue to sound the alarm on the woke and bloat in President Biden’s spending agenda as we work to reverse the curse of our out-of-control federal debt. ”

Congress has failed to fully fund the government for the current fiscal year, which ends in September. Lawmakers have signed three stopgap funding bills (continuing resolutions), extending the previous fiscal year’s spending levels until March 8.