President Dwight D. Eisenhower famously said, “plans are worthless, but planning is everything.” The Internal Revenue Service (IRS) is learning that lesson after Congress showed that what Congress gives, Congress can take away. After spending months creating a strategic plan for the money allocated to the IRS less than a year ago in the Inflation Reduction Act (IRA), Congress just cut the IRS’s funding by up to $21.4 billion over the next three years. The Fiscal Responsibility Act of 2023 might significantly undermine the plans put together by the IRS; however, the IRS’s planning may ultimately be useful for what remains.
On April 6, 2023, the IRS announced the release of its Strategic Operating Plan for the next ten years.1 The IRS developed the plan to outline its goals for the significant long-term funding—$80 billion—that was initially allocated to the IRS in the IRA. The plan spans topics from staff increases to tax enforcement, to system upgrades, and the IRS announced it as “an ambitious effort to transform the tax agency and dramatically improve service to taxpayers and the nation during the next decade.”2 The IRS clarified that the plan is organized around five primary objectives:
Among other objectives outlined in its comprehensive plan, the IRS emphasizes the focus on making sure taxpayers understand their tax obligations and face as few barriers as possible to meeting those obligations. The IRS acknowledges that under the current system those who need the most help, low-income taxpayers, those with health issues, and those with limited English proficiency, are the hardest to serve. This in turn creates both issues with taxpayer understanding and taxpayer compliance. To this end, the IRS has been focused on ways to allow low-income taxpayers to file their tax returns directly with the IRS for free. The IRS also plans to increase the level of formal and informal guidance it provides to taxpayers. Additionally, the IRS indicates that they intend to digitize as many IRS Forms as possible to allow people the flexibility to input and file IRS forms online.
As explained in the Strategic Operating Plan, the majority of the allocated budget is planned to be used on tax enforcement. Specifically, the IRS expects to spend $47.4 billion on tax enforcement. The IRS intends to target taxpayers who make over $400,000 a year, those who have complicated tax returns, and corporations. To help achieve these goals, the IRS plans to hire more auditing staff. This includes hiring agents who will specialize in large partnerships and corporate audits. The IRS also seeks to develop a unified model whereby all tax returns could be assessed for noncompliance.
The Fiscal Responsibility Act of 2023 eliminates over a quarter of the new funding awarded to the IRS in the IRA.4 Specifically, the Fiscal Responsibility Act of 2023: (1) claws back $1.4 billion of unobligated funding this fiscal year; (2) repurposes $10 billion in the fiscal 2024 appropriations process; and (3) reallocates $10 billion in fiscal 2025 to nondefense priorities. The Fiscal Responsibility Act, however, does not claw back funding for taxpayer services or business system modernizations.
It appears that Congress expected most of these reductions to come from enforcement funding. The Congressional Budget Office (CBO) has projected that the total clawback will reduce the Federal government’s revenue by about $40.4 billion.5 This will result in a deficit increase of approximately $19 billion over the next decade.
Where the $1.4 billion in cuts this year will come from is almost entirely left to the discretion of the Biden administration. In fact, funds may be removed from IRS operations, tax enforcement, select Treasury departments or the US Tax Court. Overall, the CBO expects that these reductions will result in a $900 million increase in the deficit over the next ten years because of lower tax enforcement.6
The IRS has neither officially commented on the effects of The Fiscal Responsibility Act of 2023, nor on the effects of its long-term goals outlined in its strategic plan. The Commissioner of the Internal Revenue Service, Daniel Werfel, however, seemed to anticipate these cuts in his opening letter to the strategic plan. He noted that if Congress intends to cut the overall budget of the IRS, then funding from the IRA would have to be shifted to run general operations. This implies that goals in the strategic plan would likely suffer due to decreased funding.
The reduction in the IRS’s IRA appropriation is likely to hamper some of its long-term goals; however, we have yet to see how the IRS’s plans will change in response to the budget cuts. While most cuts are expected to come from the enforcement divisions of the IRS, it is possible that some taxpayer enhancements may be delayed or canceled due to the decreased budget. Only time will tell how the IRS will continue to push its strategic plan with less capital than originally anticipated. The other worry is that Congress may continue to try and use IRS funding for other projects since the precedent of cutting IRS appropriations has now been established.7 While the IRS’s plans are subject to newly imposed legislative limitations, the planning itself was undertaken with an awareness of a potential obligation to deviate, at least to some extent. Hopefully, this kind of strategic planning provides enough flexibility to adapt efficiently and still achieve important goals that positively transform tax administration and services provided to taxpayers and tax professionals. Contact our team today at (410) 497-5947 or you can schedule a confidential consultation.