Tax Strategy: The impact of IRS funding in the Inflation Reduction Act


The Internal Revenue Service was provided with almost $80 billion in supplemental funding over a ten-year period by the Inflation Reduction Act to assist in restoring its operations after years of underfunding. The funds are stated to be intended to be in addition to their regular funding, which currently has been running around $14 billion per year, with some annual increases under the current administration. The House Republicans, in their “Commitment to America” ahead of the mid-term elections, are promising to try to repeal the provision if they get control of the House. 

The Inflation Reduction Act

The Inflation Reduction Act provides some direction as to how the funds are to be expended. $45.6 billion is allocated to enforcement. This is described as activities to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations (including investigative technology), to provide digital asset monitoring and compliance activities, to enforce criminal statutes related to violations of internal revenue laws and other financial crimes, to purchase and hire passenger motor vehicles, and to perform other services as may be determined by the commissioner.

$25.3 billion is allocated to operations support. This is described as for the necessary expenses of the IRS to support taxpayer services and enforcement programs, including rent payments; facilities services; printing; postage; physical security; headquarters and other IRS-wide administration activities; research and statistics of income; telecommunications; information technology development, enhancement, operations, maintenance, and security; the hire of passenger motor vehicles; the operations of the IRS Oversight Board; and other services as may be determined by the commissioner. 

$4.75 billion is allocated to business systems modernization. This includes necessary expenses of the IRS’s business systems modernization program, including development of callback technology and other technology to provide a more personalized customer service, but not including the operation and maintenance of legacy systems.

$3.18 billion is allocated to taxpayer services. This includes pre-filing assistance and education, filing and account services, taxpayer advocacy services, and other services as may be determined by the commissioner.

There is also $15 million to be used by the service to deliver to Congress by May 16, 2023, a report on:

  • The cost of developing and running a free direct efile tax return system, including costs to differentiate based on taxpayers’ adjusted gross income and return complexity, costs to build and administer, and costs of multilingual and mobile-friendly features and safeguards for taxpayer data; 
  • Taxpayer opinions, expectations, and level of trust, based on surveys; and, 
  • The opinions of an independent third-party on the overall feasibility, approach, schedule, cost, organization design, and IRS capacity to deliver such a direct e-file tax return system.

The Inflation Reduction Act also allocated smaller amounts for various other specific functions: $403 million for the Treasury Inspector General for Tax Administration; $104 million for the Office of Tax Policy; $153 million for the U.S. Tax Court; and $50 million for the Treasury departmental offices.

Treasury Secretary Yellen

Responding to criticism of how the additional IRS funding might be spent, Treasury Secretary Janet Yellen has provided some directions and guidelines to respond to some of those concerns. Secretary Yellen has directed that the IRS not use new funding to increase audits on small businesses or households making under $400,000 annually relative to historical levels. The $400,000 figure appears designed to align with President Biden’s promise not to raise taxes on anyone making less than $400,000 per year. In testimony before Congress, IRS Commissioner Rettig had mentioned a focus on taxpayers making more than $100,000 per year, so Secretary Yellen would appear to be imposing a focus on even higher-income individuals.

Audit rates have generally been declining for several years due to diminished IRS resources, so Secretary Yellen’s reference to “historical levels” would appear to give the IRS leverage to increase audit rates to some extent even on those with incomes under $400,000 back to some level that had been achieved in the past. The audit rates started to decline after the Internal Revenue Service Restructuring and Reform Act of 1998 and subsequent limits on IRS funding.

The IRS clearly has a lot of room to maneuver to regain historic audit rates. The higher historic audit rates at the bottom of the income level relates to tracking of abuse of refundable credits and non-filers. Otherwise, the IRS has historically focused on higher-income individuals and corporations. The IRS has focused its diminished resources there since that provided the opportunity for the largest recoveries for a given amount of effort, with a significant portion of the tax gap (the difference between what is owed in federal income taxes and what is collected) falling among higher-income businesses and individuals. S corporations tend to be smaller corporations. The IRS has long struggled with the complexities of auditing partnerships; however, other recent legislation appears likely to help the IRS in that area as well, permitting imposing tax deficiencies on the partnership itself, rather than the partners. Still, there does appear to be room under Secretary Yellen’s guidelines to increase audits from their current levels on those earning under $400,000 as well.

Based in the IRS Data Book, some examples of IRS audit rates demonstrate the declines:

Secretary Yellen also has outlined goals to improve customer service for the filing of 2022 tax returns. This includes staffing Tax Assistance Centers to help at least 2.7 million Americans rather than the 900,000 helped last year. Staffing is to be increased at call centers with a goal of achieving an 85% level of service as compared to a 10-15% level last year, as well as reducing the wait times on a call from 30 minutes to less than 15 minutes. Longer term, Secretary Yellen also committed to digitization of the processing of paper returns.

Revenue agents

There have been warnings that this additional funding for the IRS will result in 87,000 revenue agents auditing every taxpayer and diverting funds from other federal programs. Former IRS Commissioner Charles Rossotti has countered that the funding is actually likely only to increase revenue agents from the current 8,200 to about 17,000, not significantly more than the 15,540 revenue agents the IRS has in the mid-1990s before the IRS Restructuring and Reform Act, especially given the doubling of the economy and additional complexity of the Tax Code in the interim. Rossotti also stated that, far from robbing other federal programs of their funding, funding of IRS enforcement is expected to produce additional federal revenues from collections beyond the funding costs to help support other federal programs.


The funding for the IRS provided by the Inflation Reduction Act is sufficiently significant to enable the IRS to modernize and restructure itself to achieve the goals outlined in the legislation. Tax practitioners will welcome improved IRS response times, a shift to digital communications, and digital processing of paper tax returns. Even a partial reduction in the tax gap by improving IRS enforcement will promote the voluntary compliance that is at the heart of the federal tax system and provide additional federal revenues to reduce pressure to increase taxes or cut federal spending. 

With the new funding spread over 10 years, there is no guarantee that the funding will not be reduced in the future before some of these goals can be fully achieved. Most observers predict that it will take several years for the IRS to fully staff up and put the technology in place to achieve the goals outlined in the legislation.

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