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What about That IRS Funding?

One of the Democrats' prized achievements in the Inflation Reduction Act was increasing the IRS' funding by $80 billion so it could bring its computer systems out of the 1960s, hire more people, improve taxpayer services, and go after rich tax cheats. Not surprisingly, given that their party still takes orders from the wealthy donors, at least sometimes, Republicans were adamant about killing this increase and tried mightily to reverse it during the hostage crisis. They nominally got a quarter of what they wanted, but not definitely.

First of all, the $80 billion is not a lump-sum payment to go to IRS in 2023. It is the total increase over 10 years. If the Democrats get the trifecta anytime in that period, they can simply increase IRS' budget by any amount they want to using the budget reconciliation process. Nothing in the current bill will bind a future Democratic Congress.

More to the point, there is nothing concrete in the debt-ceiling bill. There is an oral agreement between Joe Biden and Kevin McCarthy that $10 billion will be "repurposed" this year and $10 billion will be "repurposed" next year. If McCarthy should cease to be speaker, Biden could easily say that the deal is off because he never promised the new speaker anything and the agreement has to be renegotiated, this time not under the gun.

But assuming the IRS really gets an additional $60 billion above its normal budget as opposed to $80 billion, there will be $29 billion available for extra auditing and enforcement instead of $45 billion. That will translate into hiring fewer revenue agents long-term. It will also translate into hiring fewer ICT people to update and maintain the IRS computer systems. One thing the IRS wants to do is develop "big data" tools to help it automatically pinpoint where detailed audits might be needed. For example, if IRS has a detailed model of how much various kinds of businesses take in and how much their expenses normally are, its computers can spit out business tax returns that deviate substantially from the model. Then a human auditor can take a look to see what is going on. Having a computer select returns that look fishy can make the IRS limited auditing capability go much further. The cuts in funding will delay developing this kind of advanced software, which in turn, will slow down a reduction in the "tax gap," the difference between what individuals and businesses owe according to the law and what IRS collects.

In short, while Democrats would have preferred no cuts to the additional IRS funding, all is not lost because nothing is actually in the debt ceiling bill. This gives future Congresses the possibility of restoring the cuts. It also means the IRS has to be more careful in how it spends the new money it will get. But the fact that IRS handled multiple rounds of stimulus payments during the pandemic shows that although it is a big bureaucracy, it was surprisingly nimble and resourceful when it had to be. (V)

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