By cutting funding and staff, Congress and President Donald Trump have largely ended the Biden Administration’s plans to spur transformational change at the Internal Revenue Service. 

How will these rollbacks affect tax administration, tax policy, and, ultimately, taxpayers? Former top IRS and Treasury officials and other experts on the federal tax system, artificial intelligence, and the public’s attitude about taxation will share their answers to these questions at an April 15 Tax Policy Center event. We hope you’ll join us.

Here’s some background information on the issues that we will cover.

The big picture

The 2022 Inflation Reduction Act (IRA) provided nearly $80 billion in new funding over 10 years for the IRS to improve enforcement, operations, technology, and taxpayer services. Since 2023, Congress has rescinded $42 billion of that funding (Table 1). 

About $9 billion had been spent as of September 30, 2024, but of that amount, the IRS diverted $2 billion to pay for routine expenses because the annual Congressional appropriation was insufficient to keep up with inflation. 

As part of Trump’s downsizing of government, 11 percent of the IRS workforce accepted buyouts or were laid off in February. (In response to an injunction, the laid-off workers were later reinstated but placed on administrative leave at least temporarily.) The Washington Post reports more layoffs are planned between now and mid-May, bringing staff cuts up to 18 percent (Table 2). (Treasury Secretary Scott Bessent denies that final decisions have been made.)

Enforcement has been hit hardest, but the outlook for taxpayer services and modernization is also grim—in part, due to insufficient funds included in IRA for those two accounts.

Enforcement

The whittling away of IRA funds began within months of its passage. Almost immediately, some Republican legislators warned that armed IRS agents would come after middle-income taxpayers. Treasury officials denied this assertion, noting that audit rates for taxpayers with income below $400,000 would not increase relative to historic levels. 

Those unsubstantiated claims of armed agents and audits of law-abiding middle-income citizens set the stage for the IRS’s reversal of fortunes. Of the original allocation, only $3.8 billion is still authorized for the enforcement initiatives.  

Some of that money has already been spent. Through September 30, 2024, the IRS spent $1.6 billion of the IRA funds on enforcement. More recent spending data are not yet available, but it’s safe to assume that the IRS has a lot less than $2.2 billion left in the enforcement account.

There’s no easy answer to why the IRS didn’t spend more IRA money on enforcement within the first two years of its enactment. Perhaps the IRS was being cautious: Long-term investments in audit selection and procedures, for example, should be carefully planned and tested before spending billions of dollars.

Spending was also constrained by hiring challenges. To increase compliance among high-income taxpayers and big businesses, the IRS sought skilled accountants and tax lawyers in a very competitive job market. 

But, even though the agency received authority to expedite hiring to meet critical needs, it paused recruitment after the Office of Personnel and Management objected to some IRS promotion procedures. Delays also resulted from an understaffed human resource office, miscommunication, and prolonged security checks.

Thus, the IRS hired only 495 full-time equivalent employees to fill enforcement slots in 2023, while it brought in 10,500 for taxpayer services. The agency planned to hire about 3,600 new enforcement staff in 2024 and another 3,150 in 2025. 

The upshot: The enforcement workforce probably had a higher proportion of probationary workers who were more vulnerable to layoffs than most groups of IRS employees. 

Over two-thirds of the IRS staff reductions since February have occurred in the enforcement category, according to the Washington Post. Buyouts and layoffs of people viewed as critical to the filing season have been delayed until after April 15, but even then, enforcement workers will make up 45 percent of staffing reductions. 

Anecdotal reports indicate immediate impacts—with ongoing audits being quickly settled or reassigned to remaining staff, and with fewer audits of higher-income and large businesses initiated. And there are reports that voluntary compliance is falling.

Taxpayer Services and Modernization

The recissions didn’t reduce the IRA funds for taxpayer services and modernization, but the initial allocations for those accounts were much smaller than the increases in enforcement funding: $3.2 billion for taxpayer services and $4.8 billion for technological modernization. Even a year ago, the IRS had forecast that new funding for those two accounts would run out in 2026 and buyouts, furloughs, and even layoffs might be necessary.

The damage to modernization efforts goes even deeper. Following IRA’s passage, Congress zeroed out the annual appropriation for modernization. Appropriators asserted that the technology upgrades—such as using artificial intelligence (AI) to increase the efficiency of audit selection—would be funded out of IRA monies. 

But if The Washington Post report is correct, over 30 percent of the staff that work for the Chief Information Officer (CIO) will be gone by mid-May. Already last week, the IRS placed 50 IT executives on administrative leave. And the Department of Government Efficiency has put modernization on hold—even as they say that greater reliance on AI will fill the void left by the laid-off workers. 

Past and Future of IRA and the IRS

In the two years since IRA’s passage, the IRS made significant improvements to taxpayer services and enforcement. More taxpayers had their phone calls promptly answered or received help in person at a Taxpayer Assistance Center, and the agency developed a simpler, online, and free method for filing tax returns (Direct File). The IRS increased collections of taxes owed by higher-income taxpayers, began audits of some of the largest partnerships, and moved to strengthen IT security. 

With the rollbacks of funding and staff, those improvements may not be sustainable, and the many other initiatives described in the IRS’s strategic plan are probably not achievable. The IRS may yet undergo transformational change, but starkly different than the intent of the IRA. 

What is the future of the IRS? Come to the TPC event on Tax Day to hear from the experts and share your views.