Impact of IRA Funding Reduction on IRS Operations Expected to be Limited in the Near Term

The recent reduction in funding allocated to the Internal Revenue Service (IRS) under the Inflation Reduction Act of 2022 is not anticipated to have significant immediate consequences for the agency’s plans, according to an IRS official. Although over $21 billion of the allocated funds was rescinded or repurposed, leaving approximately $60 billion remaining, the IRS remains optimistic about its ability to implement transformative changes.

Remaining Opportunities for Transformation

During the NYU Tax Controversy Forum on June 8, 2023, IRS Deputy Commissioner of Services and Enforcement, Douglas O’Donnell, emphasized that despite the $20 billion cut, there is still substantial funding available to catalyze agency-wide transformations. The $60 billion remaining presents an opportunity that the IRS did not have a year ago, offering the potential to enact meaningful changes.

Assessing the Impact

O’Donnell acknowledged that the IRS is currently evaluating the implications of the funding reduction and exploring various scenarios. While uncertainties persist, he expressed confidence in the agency’s ability to maintain its original plan for the first five years of the 10-year Strategic Operating Plan, which outlines how the IRS intended to use the initial $80 billion in funding. The primary challenge is expected to arise in the later years of the plan, necessitating adjustments to accommodate the reduced funding.

Honoring the $400,000 Pledge

O’Donnell provided insight into the IRS’s commitment to refrain from increasing audit rates beyond the levels recorded in 2018 for individuals and businesses earning less than $400,000. He noted that the selected year had relatively low coverage, indicating that limited time would be spent on audits for those taxpayers. Consequently, IRS employees will need to swiftly shift their focus to other areas of work. The agency is currently exploring strategies to balance compliance requirements, particularly regarding the Earned Income Tax Credit, which historically triggered correspondence examinations.

Preparing for Changes

In order to fulfill the pledge and align with revised priorities, the IRS will undertake training initiatives to equip employees with the necessary skills for different types of work. O’Donnell assured that further details regarding these changes will be forthcoming in the coming weeks and days, outlining the IRS’s plans to adapt its operations while maintaining compliance and meeting its commitments.

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