The IRS is about to run out of enforcement money

"The IRS is about to run out of enforcement money," per FORTUNE and AP.

Facing potential budget cuts under the incoming Trump administration, U.S. Treasury officials are urging Congress to release $20 billion in IRS enforcement funds that have been effectively frozen due to legislative constraints.

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With President Joe Biden’s term nearing its end, Treasury officials are pressing for action during ongoing budget negotiations to free up the funds. The $20 billion at stake is distinct from another $20 billion previously rescinded from the IRS last year. However, a legislative mechanism inadvertently duplicated the earlier cut, leaving the enforcement money inaccessible.

Potential Deficit Impact

Treasury Deputy Secretary Wally Adeyemo warned of significant consequences if the funds remain frozen, including a $140 billion increase in the national deficit. Without the funds, the IRS would face a hiring freeze, 6,000 fewer audits of high-income individuals, and 2,000 fewer audits of large corporations.

“The IRS is potentially facing dramatic decisions about stopping hiring and budgeting for a scenario where they lack $20 billion,” Adeyemo said in a call with reporters Tuesday. “At the current pace, without these funds, the agency would run out of enforcement money by fiscal year 2025.”

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Broader Economic Concerns

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, joined Adeyemo in emphasizing the risks of reduced IRS funding. She noted that cutting enforcement funding could exacerbate the federal deficit, which currently stands at approximately $36 trillion. Rising borrowing costs, driven by post-pandemic inflation, have pushed debt servicing expenses to levels exceeding national security spending.

“Given the fiscal situation, we deeply hope there is no regression in maintaining revenue allocated to the IRS for improved tax collection,” MacGuineas said.

Background on IRS Funding

The IRS originally received an $80 billion boost through the Democrats’ Inflation Reduction Act. However, subsequent deals—such as the 2023 debt ceiling agreement between Republicans and the White House—have clawed back significant portions of that funding, including $1.4 billion last year and an additional $20 billion earmarked for reallocation over two years to other non-defense programs.

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Incoming Administration's Stance

The funding issue coincides with a Republican-controlled Senate and House, alongside President-elect Donald Trump, signaling potential policy shifts. While Trump has outlined his tax plans extensively, he has not detailed specific cuts to the IRS budget. However, he has repeatedly amplified the debunked claim that the IRS hired 87,000 armed agents to target taxpayers.

If Congress fails to unlock the frozen funds, it could hinder the IRS's enforcement capabilities, adding to fiscal pressures and jeopardizing tax compliance efforts in the years ahead.

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