IRS suffers another $20B budget cut

The continuing resolution that the Senate narrowly approved last Friday and President Trump signed on Saturday included a $20.2 billion cut in the Internal Revenue Service's budget, the third such cut since 2023, clawing back another chunk of the $80 billion that it was supposed to receive over 10 years from the Inflation Reduction Act of 2022. The agency is now planning to pause its technology modernization efforts.

The budget reduction occurred as the Trump administration and the Elon Musk-led U.S. DOGE Service have already begun layoffs at the embattled agency, with between 6,000 and 7,000 employees cut from its ranks. According to CNN, 6,700 probationary employees at the IRS have been laid off, and 4,700 accepted a voluntary buyout offer from the Office of Personnel Management's "Fork in the Road" memo, also known as the "deferred resignation program." However, IRS employees who accepted the buyout offer have been told to continue working through May 15, a month after the April 15 tax filing date, unlike other federal employees, and the buyout program closed as of Feb. 12. 

After the resignations of former IRS Commissioner Danny Werfel, who stepped down shortly before Trump's inauguration, and the abrupt retirement of acting commissioner Doug O'Donnell, the new leadership at the IRS has reportedly been making plans for staff reduction of up to 50%. That percentage now seems to have been revised down to a reduction of about 20% of the agency's workforce by May 15. Over 20% of the staff at the Taxpayer Advocate Service, or 430 out of about 1,900 employees, are slated to be cut, the Washington Post reported Monday, in addition to 90 employees who have already accepted the voluntary buyout offer.

However, it's unclear what the final number will be in the overall staff reductions. In January, the IRS reportedly had over 100,000 employees, according to the Federal News Network.

"I've seen numbers of 20%, I've seen numbers of 30%, I've seen numbers of 50%," said Tax Guard CEO Hansen Rada. "It's really difficult to tell what is true, and I don't think anybody knows, because the proposal has been private, so there is definitely a giant question mark as to how strong the IRS will be going forward."

Treasury Secretary Scott Bessent disputed the numbers that have been reported in the news during an interview Sunday with Kristin Welker on NBC's Meet the Press.

"I will tell you that there were about 15,000 probationary employees that we could have let go," he said. "We kept about 7,500 or 8,500 because we view them as essential to the mission. And we will know once we get inside. But what I can tell you is that we are doing a big review. We're not doing anything — right now it's playoff season for us. April 15 is game day, and even employees who could take voluntary retirement — the rest of the federal workforce, their date was in February — our date for them is in May. So I have three priorities for the IRS — collections, privacy and customer service — and we'll see what level is needed to prioritize all of those."

Despite the cuts in the IRS budget and staffing levels, the agency has spent relatively little of the funding it was set to receive under the Inflation Reduction Act before and after it was reduced. According to a report released last week by the Treasury Inspector General for Tax Administration, as of Sept. 30, 2024, the IRS has spent approximately $9 billion (16%) of its $57.8 billion in Inflation Reduction Act funding. The biggest expenditure was $3.7 billion for employee compensation.

"IRS officials indicated that approximately $2 billion has been used to supplement its annual appropriation because the amount the IRS received was insufficient to cover normal operating expenses," said TIGTA.

The TIGTA report noted that the Further Consolidated Appropriation Act of 2024 provided annual appropriated funding of approximately $12.3 billion for three out of four IRS primary budget activities for fiscal year 2024. However, Congress provided no appropriated funding for business systems modernization, which normally funds upgrades to IRS information technology systems.  

The IRS originally received $79.4 billion in supplemental funding when President Biden signed the Inflation Reduction Act into law in August 2022, and the extra funding was supposed to be used for improving the agency's enforcement, taxpayer services and technology efforts. Congress subsequently rescinded approximately $21.6 billion in IRA funding, reducing the available funding to approximately $57.8 billion. In addition, the American Relief Act of 2025, which provided appropriation funding to federal agencies through March 14, 2025, froze another $20.2 billion in IRA enforcement funds. The report said this supplemental funding is available through Sept. 30, 2031, but the report was released before the latest stopgap funding bill passed over the weekend. Despite the series of cuts, an IRS official believes $37.6 billion in funding remains from the Inflation Reduction Act.

Technology and data security

Last week, a senior IRS official told reporters that the agency would be pausing its technology modernization efforts and reevaluating its approach to leverage artificial intelligence, according to Reuters. The IRS is going to be reviewing a number of its recent initiatives during the "strategic pause," including its Direct File program for free tax preparation, which expanded from 12 states during a pilot program last year to 25 states this tax season. 

The IRS has also been facing questions over the security and privacy over the data in its systems after DOGE employees demanded access to its systems, leading to the ouster of IRS acting chief counsel William Paul, who was replaced by Andrew de Mello. A court granted a preliminary injunction against DOGE getting access to taxpayer data held by the Treasury Department in response to a lawsuit from 19 states, led by New York.

"The preliminary injunction that's in place in New York v Trump prohibits any access to IRS data systems by people at DOGE or employed by DOGE," said Anne Gibson, a senior legal analyst at Wolters Kluwer. "For the moment, that seems like it would prevent their access to IRS data systems, and if they were to access it, it would be in violation of the preliminary injunction. That said, this preliminary injunction is on the basis that the training, vetting and credentialing of the DOGE employees who did have access to Treasury data briefly was inadequate and wasn't done properly. And the government is given an opportunity to file a report with the court explaining how they would give DOGE employees proper training, proper oversight, proper vetting, and if they could do that, the preliminary injection would be reconsidered, and that process has actually already started."

A key date in that process is today, March 17. "The government submitted a report," said Gibson. "It seemed to be only in relation to only one employee, but the court, on the basis of them following that report, set up a new briefing schedule, the final pieces of which are due on the 17th of March, so an opportunity for the government to file their motion, and for the states to file their opposition motion, and then for replies. That's all due by March 17, and then we could see further action from the court, so there's a possibility that that preliminary injunction, if the court is happy with the government's new process, could be lifted relatively soon."

A lawsuit has also been filed by a pair of immigrant advocacy organizations over the Department of Homeland Security's demands for information from taxpayers suspected of being in the U.S. illegally, specifically from holders of Individual Taxpayer Identification Numbers. This reportedly led to O'Donnell's abrupt retirement, as such a demand could violate Section 6103 of the Tax Code, which provides civil and criminal penalties for improper disclosure of taxpayer information.

"In terms of Section 6103, I think that's a bigger issue," said Gibson. "The restrictions on both disclosure of tax return information, or even just accessing tax return information that's not for one of the specified purposes that's laid out in that section, it's very stringent, very strict requirements there, and there are criminal and civil penalties for violating that, and it specifically references the strict requirements for giving tax return information to the executive branch and to the president, in particular the agencies under the president. However, if that section were violated, any criminal or civil penalties would need to come after the attorney general brings a case. That's a question if that would happen. On the other hand, taxpayers can bring a lawsuit for money damages if their data has been inappropriately accessed."