The Internal Revenue Service may be facing steep cuts in its budget with the win on Tuesday night of President-elect Donald Trump.
Funding for the IRS has become a political issue, with Republicans successfully pushing to cut the extra $80 billion funding from the Inflation Reduction Act of 2022 already during battles over the debt limit.
"I think IRS funding is at significant risk right now, both the annual appropriation funding as well as the remaining IRA funding," said Washington National Tax Office principal Rochelle Hodes at the Top 25 Firm Crowe LLP.
So far, Republicans have mainly called for cuts in the IRS's enforcement budget. The increase in enforcement is supposed to be used to pay for the cost of the IRA, but the funding increase is also supposed to be used for taxpayer service and technology improvements.
"The only question for me on funding is, will any portion of the funding remain available for taxpayer service-related improvements at the IRS?" said Hodes.
The Direct File free tax prep program that the IRA funded could also be targeted, even as the IRS makes plans to
"I don't think that will be in the sight line, but the IRA money is part of what's being used for that," said Hodes. "As we've seen in appropriations bills, there could be language directed at that, that no money can be spent on that initiative."
A more important priority will be the extension of the expiring provisions of the Tax Cuts and Jobs Act of 2017. "Getting TCJA resolved is going to be the first priority," said Hodes. "The second question is, how will the cost of that endeavor be determined. If the view that is held by several Senate Republicans wins the day, then the cost of extending the expiring provisions will not be counted under those particular budget rules that are created dealing with extending current policy. If, however, that view is not adopted, then there is a high cost just to TCJA, and so any other provisions with cost will sort of stretch the boundaries of what many in Congress would be comfortable with. I think it will be necessary to see how the scoring goes for extending TCJA provisions."
Trump has also called for exempting various forms of income, such as tip income, Social Security income and overtime from taxes.
"I also am not sure which of the ideas that were put forward on the campaign trail, other than extending TCJA, are provisions that have true champions who will want to pursue those," said Hodes.
That may depend on who ends up in Congress, with several important races in the House yet to be decided.
"Although the House remains undecided, the Republicans' control of the Senate makes it much more likely that Republicans will be able to implement many of Trump's proposed tax policies, such as making parts of the expiring 2017 TCJA provisions permanent," said John Gimigliano, principal in charge of the Federal Legislative & Regulatory Services group within KPMG's Washington National Tax practice, in a statement. "The pressing question now is how the Administration and Congress will fund such an ambitious agenda and what additional measures they might introduce, such as eliminating taxes on tips and overtime. These items will only add to the hefty $4+ trillion price tag they face. Until then, taxpayers should continue to stay apprised of developments and scenario plan for the different outcomes to get ahead."
