The federal budget deal, cemented earlier this month with a handshake, has fostered speculation as to the exact places where money will be cut — particularly with the Internal Revenue Service — and what might replace the proposed programs. The agreement to temporarily suspend the debt limit has made it possible for talks to continue in the face of scathing criticisms about the inflationary effect of the proposals.
What we now have is a 214-page proposed bill that was released by the House Appropriations Committee Subcommittee on Financial Services and General Government. Their FY 2024 funding bill:
- Provides $11.2 billion for the IRS;
- Provides a $1.1 billion cut over FY 2023; and,
- Rescinds $10.2 billion in IRS funds previously appropriated under the Inflation Reduction Act.
The counterpart bill in the Senate includes input from both parties. They negotiated a deal where, among other things, the Defense Department agreed to an increase of only 7% a year, and the IRS took a "haircut" of 10% a year over the next few years, according to John Sheeley, a continuing education provider through Tax Practice Pro Inc.
"That amounts to $1.4 billion for the 2023 fiscal year, and $10 billion over the next two coming off the $80 billion the Inflation Reduction Act gave them," he said. "There was a rumor that they had to stop immediate hiring due to the necessity of offering jobs that won't disappear within a year or two. How do you hire today knowing that you will have to cut expenses down the road?"
"We finally got the IRS to a level where they were getting real money," said Sheeley. "They were answering the phones again — but now that that's happened, they're starting to take away the money again. When you look at the COVID operations page, it's interesting to see week to week how many returns are moving or not. Now that they're making progress, they're taking away some of that money that enabled them to make the progress."
With $1.4 billion immediately gone, and another $20 billion likely to be lost, that will probably slow the audits of wealthier taxpayers, according to Bill Smith, national director of tax technical services for the National Tax Office at Top 100 Firm CBIZ MHM. It looks like the IRS will still move forward with its revamping and its goals for customer service improvements, he noted, and they will not cut back on the Employee Retention Credit audits or enforcement.
"I'm glad to hear that they won't pull any resources away from enforcement," Smith said. "Most of what are commonly referred to as 'credit mills' do these on a contingency basis. And most contingent fee preparation firms will have long since folded their doors after they get paid their 20%."
The agreement will have its effect on the IRS strategic plan, according to Ed Renn, a partner in the private client and tax team at law firm Withers. "[Treasury Secretary Janet] Yellen has said that the strategic plan would only work if steady appropriations continue. Republicans would like to eliminate all funding increases, but there's a correlation that for every dollar they spend on enforcement they raise a multiple of that. If it costs $100 to put an auditor in the field, by cutting enforcement you are creating a bigger deficit."
The budget agreement illustrates how fleeting money is, according to Roger Harris, president of Padgett Business Services: "With the initial $87 billion now already cut to $58 or $60 million, you wonder how much of that money is something you can count on depending on how the next election turns out."
"What the IRS will do is try to make as many noticeable improvements as taxpayers can see to make it harder to continue to take money away from them," he continued. "It's too early to judge. Everybody agrees that last tax season was better, but some of that was due to improvements already in the books. But it will be harder to take money away from the service if everyone sees things getting better."
