With Tax Day 2024 just around the corner, taxpayers have a right to expect efficient processing of their returns and that their fellow Americans are paying what they owe. Unfortunately, the confidence in both of these assumptions may be less secure than it ought to be due in part to concerted efforts to curb the federal government’s ability to provide these critical services. The 2010’s saw significant cuts to the Internal Revenue Service’s budget, making the taxpayer experience less efficient and allowing nefarious actors to skirt their tax liabilities without significant oversight. With a diminished staff, the highest proportion of employees approaching retirement of any federal agency, significantly reduced funding compared to the previous decade, and outdated equipment and systems, comprehensive changes were urgently needed. In 2020, the agency’s budget was 19 percent lower than in 2010, adjusted for inflation.

This reduction in funding has severely affected the agency’s enforcement capabilities and operational functions, leading to a 31 percent reduction in enforcement personnel from 2010 to 2020. These budget cuts and the consequent reduction in staff contributed to the overall audit rate plummeting by 58 percent since 2010, with audits of large corporations and millionaires decreasing by 54 percent and an astonishing 71 percent, respectively. This decline in audit rates, particularly for high-income taxpayers, has profound implications.

High earners and large corporations, who often engage in complex tax avoidance strategies, have seen a dramatic decrease in scrutiny from the IRS. This decreased enforcement not only facilitates greater tax evasion among the wealthiest, but also shifts the tax compliance burden onto honest taxpayers who contribute their fair share. Studies show that for every dollar spent on auditing top earners, the IRS can recover $12, underscoring the significant lost revenue opportunity due to underfunding.

This weakening of enforcement capability comes at a time when the tax gap —the difference between taxes owed and taxes paid— has ballooned to $688 billion.

The Inflation Reduction Act (IRA) of 2022 was a turning point for the IRS, allocating an unprecedented $80 billion to the agency through fiscal year 2031. These funds were earmarked for improving taxpayer services, more stringent enforcement of tax laws, and the modernization of antiquated IT systems. This was designed to rectify the IRS’s long-standing issues, such as delays in processing tax filings and struggles with outdated technology.

The Congressional Budget Office (CBO) determined that underfunding the IRS significantly impacts federal revenues and the national deficit. Initially, the CBO estimated that the additional $80 billion funding provided through the IRA would result in an extra $186 billion in revenues over the 2023–2032 period.

However, the Fiscal Responsibility Act of 2023 rescinded $1.4 billion of the unobligated mandatory funding from the IRS. This reduction, part of a larger agreement that includes reallocating an additional $20 billion of IRS funding for fiscal years 2024 and 2025, further restricts the resources available to the IRS for enforcement efforts, which are essential for narrowing the tax gap and ensuring compliance across income brackets.

The CBO found that rescinding $20 billion in IRS funding would not only reduce federal revenue by $44 billion over the next decade but also increase the deficit by $24 billion due to revenue losses from weakened enforcement capabilities. These findings starkly illustrate the counterproductive nature of underfunding the IRS, as it leads to significant potential revenue losses and exacerbates the federal deficit, placing a heavier financial load on the nation and its taxpayers.

Further funding complications have arisen during the prolonged FY 2024 budget process. The Schumer-Johnson agreement, announced in January, suggested withdrawing all $20.2 billion in IRS funding for FY 2024. The FY 2024 minibus agreement rescinded just over half of that amount, at $10.2 billion. For FY 2024, the IRS is slated to receive approximately $5.4 billion for enforcement, substantially less than in recent years. This figure must be considered in the context of the remaining appropriations from the IRA, but the reduction is evident.

In their FY 2025 budget proposal justification, the Treasury Department suggested allocating $58 billion for IRS enforcement over the coming decade. However, presidential budget requests seldom fully materialize and given the partisan rancor around funding for the IRS, these numbers are very unlikely to come to fruition.

The underfunding of the IRS poses a significant challenge to the fairness and efficiency of the U.S. tax system. Weakening the agency’s ability to enforce tax laws, particularly among high earners and large corporations, leads to significant revenue losses for the federal government and undermines the integrity of the tax system. As the tax gap widens and the IRS’s enforcement capabilities diminish, the urgency for reassessing funding priorities becomes more evident. Adequately funding and equipping the IRS to enforce tax laws fairly and effectively is critical for the fiscal health of the nation.