News : IRS funding battles loom large in September

Monday, July 31, 2023

IRS funding battles loom large in September

Jul 31, 2023

THE IMPASSE AHEAD: The Sept. 30 deadline to fund the government is fast approaching, yet Congress left town last week for August recess having achieved little headway on a slew of appropriations bills in both the House and the Senate.

We have, of course, seen this movie quite a few times before, but, as our Caitlin Emma and Jennifer Scholtes reported, things may prove even more delicate this time around, with Speaker Kevin McCarthy dealing with calls from a bloc of House Freedom Caucus members to slash funding by even greater levels than those agreed to under the debt limit deal struck with President Joe Biden.

That could prove very problematic, especially with regard to IRS funding.

Indeed, while McCarthy and Biden came to a handshake agreement to cleave $10 billion from the IRS’s new funding from the Inflation Reduction Act this year and another $10 billion in 2024, parties on both sides of the issue are pushing for IRS appropriation levels that would outright flout the deal — resulting in a wide gap between what Democrats and Republicans see as appropriate long-term funding for the nation’s tax administration agency.

Take the House Republicans’ opening salvo. According to appropriations data compiled by the left-leaning Center on Budget and Policy Priorities, the GOP’s initial proposals under several appropriations bills, including those on Financial Services and Transportation, Housing and Urban Development, would altogether slash a chunky $67 billion of the $80 billion total windfall the IRS received last summer from the IRA.

If those proposals manage to pass the House, they will nonetheless be dead on arrival in the Senate.

The GOP’s appropriations plan would also cut the IRS’s annual funding by $1.1 billion, while Senate appropriators would keep the agency’s annual funding flat.

MORE ON THAT IN A BIT: But first, while news on Congress will surely be moving at a slower clip during the dog days of Washington summer, folks will certainly be keeping a close eye on how lawyers salvage the Hunter Biden plea agreement that appeared to disintegrate in a Delaware court hearing last Wednesday.

The judge gave the defense and prosecution 30 days to submit briefs in support of a deal, which will likely need to address the possibility of further charges by the Justice Department against Biden under the Foreign Agents Registration Act.

If you want to get a sense of how this all may play out over the next month, Ankush Khardori, a former federal prosecutor, had a nice breakdown in POLITICO Nightly.

“[T] his was a heated dispute among lawyers and the judge concerning key legal questions that were frankly not that hard to foresee,” Khardori wrote of the hearing.

Don’t hesitate to ping us from your favorite August hideaway.

Email: bfaler@politico.com, bguggenheim@politico.com and teckert@politico.com.

Or Twitter: @tobyeckert, @brian_faler, @ben_guggenheim, @POLITICOPro and @Morning_Tax.

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WORLDS APART: It isn't a stretch to imagine how things could get dicey as McCarthy attempts to appease the factions of his party pushing for even more drastic cuts to the IRS while not putting the debt deal with Biden (which the speaker repeatedly touted as a win for the Republican caucus) in jeopardy.

While Republicans are demanding IRS rescissions that would essentially hobble the agency’s wide-ranging plans to transform its enforcement activities, operations and customer service in the coming years, Democrats in the Senate are sticking with $12.3 billion in funding for the IRS in fiscal year 2024 and the agreed-to $10 billion rescission from the debt limit agreement.

However, some left-leaning organizations are arguing that, since House Republicans aren’t playing by the rules, Democratic appropriators in the Senate shouldn’t feel like they need to either.

Noting, for instance, that House Appropriations Chair Kay Granger (R-Texas) said the debt ceiling deal established “a ceiling, not a floor for funding,” 14 advocacy groups including Groundwork Action and Americans for Tax Fairness wrote top Senate appropriators this month that the committee “is no longer obliged to move forward with the IRS cuts in its appropriations.”

THE AGENCY’S EFFORTS: At the same time that lawmakers have been battling over IRS funding cuts, the agency has been grinding ahead on efforts to innovate its computer systems and ramp up tax enforcement on wealthy individuals and large corporations — tapping a veteran government troubleshooter on Friday to fill the newly created chief transformation and strategy officer position, as our Toby Eckert reported.

And members of the tax community, who have long expressed concerns about understaffing and budget cuts at the agency, are starting to speak out about how the IRA funding has already resulted in visible improvements in IRS operations.

Notably, in a letter last Thursday to the top financial services appropriators in the Senate and the House, C. Wells Hall III, the chair of the American Bar Association Section of Taxation, said lawyers working on tax disputes are noticing that IRS officers seem better trained and more thoughtful about the positions of taxpayers following the enactment of the IRA funding.

According to the letter, ABA members have also remarked on increased guidance from the Treasury Department on new tax laws; faster turnaround on agreements, such as offers in compromise, struck when a taxpayer can’t pay off their tax debts; and more efficient processing of taxpayer identification numbers for new businesses.

“We urge Congress to provide the Service with appropriate and adequate funding so it can fulfill its core functions,” Hall said.

STATE TAXES: A report released by the IRS this spring on the feasibility of an agency-run free direct filing program indicated that taxpayers would likely be much more interested in such an option if it included the ability to file state tax returns as well as federal ones.

It seems like the agency is taking that into account as it prepares to roll out a pilot program of the system next filing system. IRS Commissioner Danny Werfel wrote to the Federation of Tax Administrators, which represents state tax officials across the country, last week extending an open invitation to administrators to collaborate on the project.

According to FTA Executive Director Sharonne Bonardi, the federation has already provided forums for the IRS to meet with state officials on the topic, in addition to sharing the contact information of key state representatives with the agency.

“FTA restates our continued commitment to assisting with the facilitation and collaboration with the IRS and states on the direct file pilot and other initiatives,” Bonardi said in a statement to Weekly Tax.

These talks could be well worth watching moving forward, especially if states have different levels of receptiveness to the IRS initiative amid intense Republican criticism of an agency-run system.

Around the World

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Bloomberg: “US Lawmakers to Travel to OECD in Europe to Talk Global Tax Deal”

Around the Nation

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KTLA: “California lost more than $300 million in tax revenue from wealthy residents moving: study”

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Did you know?

The Isabella Stewart Gardner Museum in Boston is still offering a $10 million reward for information related to the 1990 theft of 13 works of art from its premises, which include paintings by Johannes Vermeer and Edgar Degas.

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