IRS budget increase slashed in latest spending bill

An omnibus spending bill released by congressional appropriators would reduce a budget increase for the Internal Revenue Service previously passed by the House by over half.

The IRS was set to receive a 14% budget increase for tax enforcement, technology upgrades, hiring and more, but instead will receive only a 6% increase in the spending bill, mainly to improve taxpayer service. The spending bill, according to Tax Notes, leaves out a number of items that had been in a version approved by the House last summer, including a set of tax-related provisions for encouraging more retirement savings, along with a rollback of requirements for amortizing research and development costs under the Tax Cuts and Jobs Act. Accounting firms like RSM US and KPMG had hoped to convince Congress to repeal those provisions, which would affect the ability to deduct R&D costs directly without amortizing them (see story).

The House approved the $1.5 trillion omnibus spending bill on Wednesday with the goal of speeding $14 billion in military, humanitarian and economic aid to Ukraine as it comes under attack from Russia. Congress has been passing a number of short-term spending extensions since last year, but kept IRS spending at the same levels.

Al Drago/Bloomberg

Much of the increased funding will go to improving taxpayer service as the IRS has been under pressure from Democrats and Republicans alike to deal with the backlog of millions of unprocessed tax returns left over from last year, as well as the load of new returns arriving this tax season. The bill provides up to $75 million to address the IRS’s paper inventory of amended returns, correspondence and adjustments to return filings.

Overall taxpayer service would get an additional $225 million (9%) budget increase, including $21 million for investigative technology at the IRS’s Criminal Investigation division, while enforcement would also receive an extra $225 million, but that would translate to a 4% increase, according to Tax Notes. The Treasury Inspector General for Taxpayer Administration would see a 2% budget increase to $174 million, but that’s down from the 3% increase it was set to receive under the bill approved by the House last summer.

“Overall, the omnibus would provide $12.6 billion to the IRS, up from fiscal 2021’s $11.9 billion, but far short of the $13.6 billion in the House bill,” said Tax Notes.

The House ultimately passed the bill overnight.

“In this pivotal moment, the Congress has risen to meet some of the most pressing challenges at home and abroad," said House Ways and Means Committee chairman Richard Neal, D-Massachusetts. "This legislation will create good-paying jobs, lower costs for families, and support those in need. Republicans starved the Internal Revenue Service of funding for far too long, and the taxpayer has paid the price. But in this bill, Democrats deliver the largest funding increase to the agency in decades. These resources will allow the agency to hire additional staff, enhance taxpayer service, and work toward the fullest and fairest tax administration possible. Importantly, we also send urgently needed aid to the Ukrainian people who continue to endure Russia’s unprovoked invasion. While we couldn’t secure all of our priorities, I am proud of these key investments. This is the latest major deliverable in our ongoing work for the people.”