How Should Congress Fund Investments in The Internal Revenue Service’s Infrastructure?

Congress is moving toward rectifying the decade-long funding crisis at the IRS. The House is on track to adopt President Biden’s proposed $1.6 billion budget increase from the 2021 level (not counting the funds in COVID relief legislation). And the infrastructure framework agreed to by the president and a bipartisan group of senators boosts agency funding and appears to endorse Biden’s goal of making some additional IRS funding mandatory and multi-year, although at lower levels than he  proposed.

Mandatory funding is a smart move, guaranteeing financing for the agency’s own multi-year infrastructure investments. That’s an important commitment for an agency whose favorability ratings appear to drop as audit rates increase, making Congressional consideration of the IRS’s annual appropriations more politically charged when tax enforcement intensifies.

Still, there is a risk to the IRS when Congress makes some of the agency’s funding mandatory and some subject to annual appropriations. For example, a future Congress could cut the IRS’s appropriations, forcing it to make up the difference by drawing on the mandatory account.

Well-designed guardrails could prevent shell games. But they must give the IRS enough flexibility to respond to new challenges while allowing for congressional oversight.

President Biden’s three-tier funding proposal

The president’s budget steps up funding for the IRS, using three distinct budgeting tools.

It would increase the IRS “base” appropriations by $1.2 billion from the 2021 level—largely to fund efforts to increase compliance by large corporations, partnerships, and high-income taxpayers, expand data analytics, and improve taxpayer services.

Then, the president would add another $417 million for hiring new enforcement staff. This funding would be a “program integrity adjustment”—a provision in the congressional budget resolution that would allow appropriators to earmark $417 million to fund tax enforcement activities on top of the total funds allocated to the appropriations committees by the resolution.

The third tier would be the mandatory funding—guaranteeing $1.1 billion in 2022 and a total of $72.5 billion over the next decade (reduced to $40 billion under the bipartisan framework). It would be used to increase compliance by large corporations, partnerships, and high-income individuals, expand computer modernization (partly to support data analytics), and improve taxpayer services, especially for the administration of refundable tax credits.

Potential for shell game

See the problem? There’s overlap between the initiatives funded by appropriations and the mandatory funds, allowing for shell games.

Say, for example, the IRS decides to substantially increase the audit rate for the largest corporations. Under the president’s plan, those audits could be paid for with either appropriations or mandatory funds.

Let’s assume that the IRS uses the discretionary funds for those audits and preserves the mandatory funding for other long-term projects. A few years down the road, appropriators could cut the discretionary funding, forcing the agency to make a choice: Either reduce audits of the largest corporations or take money from another program that was funded with mandatory dollars.

Setting boundaries

Strong guardrails could prevent that from happening.

Final legislation should set explicit boundaries between uses of discretionary and mandatory funds but provide flexibility for changing priorities over time. It could specify that mandatory funding would be used solely for three types of projects that span at least three years: long-term technology investments, multi-year enforcement actions (typically involving in-person audits that tackle tough tax concerns common to wealthy taxpayers’ and corporations’ tax returns), and research and development.

The boundaries could be further tightened by shifting the discretionary funds currently allocated for those purposes to the mandatory side of the ledger and—going forward—limiting the use of discretionary funds to operational expenses.  

Finally, Congress should recognize the distinction between development and operations. For example, IRS could use mandatory funding to develop a better system to distribute refundable tax credits but fund the newly activated system through annual appropriations. That approach would free the mandatory funds to meet new challenges.

What about oversight?

At a recent House Ways and Means committee hearing, several Republicans objected to mandatory IRS funding because they feared Congress would lose oversight power over the agency. That’s a valid concern with any multi-year budgeting.

But the tax-writing committees already conduct extensive oversight of the IRS. In addition, they could require annual reports on mandatory spending from the IRS and the Government Accountability Office and require periodic reauthorization of the mandatory authority. The timeline for reauthorization could be once every six years—the duration covered by the IRS’s most recent modernization plan.

Oversight has another advantage. Tax policy might be better designed when the implementation costs are more transparent to the people who write the tax laws. With more legislative clarity and oversight, some mandatory funding would free the IRS to make the multi-year investments it needs, better serve taxpayers, and narrow the tax gap.

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