As the second anniversary of the Inflation Reduction Act (IRA) approaches, the Treasury Inspector General for Tax Administration (TIGTA) reports that, as of March 31, 2024, the IRS has spent $5.7 billion, or roughly ten percent, of its IRA funding. The IRS originally received $80 billion over ten years through the IRA, which was later reduced to $57.8 billion after a partial funding rescission by Congress. This TIGTA report raises questions about how effectively the IRS is using its remaining funds and whether it is prioritizing modernization and transformational changes as intended.
The IRA funds were allocated across four major IRS budget areas. Tax enforcement was funded at $45.6 billion through the IRA, but the allocation has been reduced to $24 billion through rescissions. The remaining funds were divided between operations support at $25 billion, business systems modernization at $4.8 billion, and taxpayer services at $3.2 billion. So far, the IRS has spent $690 million (3 percent) from enforcement, $2.3 billion (9 percent) from operations, $1.3 billion (27 percent) from modernization, and $1.4 billion (44 percent) from taxpayer services, with seven years to go.
Regardless of how the funds were distributed, there is broad consensus that the IRS should use this opportunity to modernize its technology and organizational culture. The National Taxpayer Advocate explains this in her most recent report to Congress, stating, “When I look back eight years from now on how the IRS spent its Inflation Reduction Act funding, the changes I consider ‘transformational’ will primarily involve the deployment of new technology and innovative thinking.”
With increasing pressure to make these transformational changes, the IRS now seems to be developing a narrative as to why it may not make strides in modernization. Earlier this year, IRS Commissioner Daniel Werfel claimed during a House Ways and Means Committee hearing that the IRS would need to borrow from modernization funding just to “keep the lights on” due to an “insufficient” base budget. The recent TIGTA report also highlights this narrative, stating that “IRS officials indicated that $2 billion of the $5.7 billion of IRA funding expended has been used to supplement its annual appropriation because the amount the IRS received was insufficient to cover normal operating expenses.”
Pitting modernization and normal operations against each other is seriously misleading, first and foremost, because the IRS received $25 billion through the IRA solely for operating support expenses, the largest IRA allocation after the enforcement rescissions. Furthermore, in the five years prior to the enactment of the IRA as well as the preceding years, the IRS operations budget account has regularly been funded at nearly 90 percent of what was requested. Within that time, the total gap between the IRS operations budget request and the enacted amount only equals $3 billion. The IRS cannot claim that the $25 billion from the IRA is insufficient to make up for this shortfall.
IRS Operations Support Funding - Annual Appropriations | |||
Year | Requested ($ millions) | Enacted ($ millions) | Funding Gap ($ millions) |
4,314 | 3,638 | -676 | |
3,946 | 3,634 | -312 | |
4,313 | 3,724 | -589 | |
4,075 | 3,809 | -266 | |
4,105 | 3,928 | -177 | |
4,448 | 4,101 | -347 | |
4,543 | 4,101 | -442 | |
4,520 | 4,101 | -419 | |
TOTAL | 34,264 | 31,036 | -3,228 |
Instead of pointing to the fact that it spent some of its large chunk of operations funding from the IRA, the IRS should be highlighting the transformations it has made with the funding.
One reason the IRS might not be focusing attention on its modernization goals is that it has yet to clearly define those goals. In March of this year, GAO reported that the IRS lacked planning and reporting for its modernization efforts outlined in its IRA Strategic Operating Plan. GAO’s recommendations from this report remain unaddressed. NTUF has also urged the IRS to provide more clarity regarding its modernization goals.
In addition, the IRS has focused its efforts on developing a Direct File pilot program, leaving other priorities, such as updating the Individual Master File, by the wayside. Unfortunately, the IRS has announced that it will continue to offer Direct File indefinitely despite failing to fully account for the costs of the pilot program. How the IRS is able to fund a brand-new Direct File program that it was never authorized to create when it is apparently struggling to “keep the lights on” remains an open question.
In its effort to explain to TIGTA why the operations budget is such a concern, the IRS drew attention to several other issues. The TIGTA report claims that “the IRS estimates that $1.6 billion of IRA funding will be needed to cover FY 2024 annual appropriation shortfalls for pay raises, inflationary increases already built into contracts, and other current services.” Regarding IRS employees, it is important to note that the IRS is struggling to attract qualified job applicants after initially planning to hire as many as 87,000 new employees with IRA funding.
Keeping the lights on is obviously a necessary part of a well-functioning IRS, but constantly using opportunities to shift focus toward the cost of normal operations is unnecessary at best and unproductive at worst. TIGTA has separately recommended that the IRS develop a plan to reduce its unneeded office space, since most IRS buildings have a workstation occupancy rate of 50 percent or less. Implementing this strategy would help lower operations costs, which is increasingly important as the so-called Inflation Reduction Act fails to achieve its stated purpose.
If the IRS proves unable to make lasting changes in its technology and taxpayer services with IRA funding, it will be due to a lack of planning and prioritization rather than a lack of adequate funding. The IRS must start focusing on real transformation efforts instead of making excuses.