From the Tax Law Offices of David W. Klasing - New Debt Ceiling Deal Cuts Budget for the IRS but not Expected to Affect Near-Term Enforcement Action

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Tax Law Offices of David W. Klasing, PC

Jul 26, 2023, 06:37 ET

IRVINE, Calif., July 26, 2023 /PRNewswire/ -- As part of the Inflation Reduction Act of 2022, the Internal Revenue Service (IRS) was infused with $80 million in additional funds to help improve customer service and enhance their ability to catch tax evaders. This was the largest single infusion of funds in the agency's history and laid the groundwork for a 10-year overhaul of this highly scrutinized arm of the federal government.

Why you should use an Attorney to represent you in an audit

However, this budget has been cut by $21.4 million as the result of a new debt ceiling deal reached by Congress over Memorial Day Weekend in 2023. This budget cut will not immediately affect IRS spending. However, the cut does create challenges for current, pending legislation. Further, the IRS will face serious financial burdens down the line if it does not alter its spending plans or receive a new infusion of funds later.

If you need help with a tax issue, seek guidance from our experienced Dual-Licensed Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

IRS Facing Budget Cut as a Result of New Debt Ceiling Deal

The Internal Revenue Service (IRS) faces a significant budget cut of $21.4 billion out of the original $80 billion windfall intended for a comprehensive revamping. These budget cuts will not affect spending for the next five years. Furthermore, the IRS hopes to recouple these funds as time goes on. Still, the proposed cuts may have far-reaching effects on the IRS's enforcement and modernization plans.

Overview of IRS Budget Cuts

The IRS budget cuts came as a surprise over Memorial Day weekend because of the debt ceiling deal. The total impact of this budget cut on the IRS's enforcement and modernization plans is uncertain at this time. The agency still has about $60 billion to spend over the next decade to improve taxpayer services, upgrade its IT infrastructure, and enhance enforcement for complex partnerships and large corporations. However, the IRS projects increased spending over the years, leaving only $12.1 and $14.1 billion for fiscal years 2030 and 2031, respectively. This could create a funding shortfall in the future if spending plans are not adjusted or if Congress does not provide additional funding.

Although the bill text technically includes an immediate rescission of only $1.4 billion from the IRS's budget, President Joe Biden has agreed to shift $10 billion from the IRS to other agencies during the fiscal year 2024 annual appropriations, with a similar shift expected for the fiscal year 2025 government funding bill. House Republicans, including House Speaker Kevin McCarthy and Rep. Adrian Smith, see these cuts as a step in the right direction, expressing concerns about the IRS's enforcement plans leading to more audits for small businesses and middle-class taxpayers.

Improvements for Taxpayer Services Still Attainable

Despite the budget cut, the IRS still has substantial funding to improve taxpayer services, and former IRS Commissioners, John Koskinen and Mark Everson, hope that this budget cut will bring some certainty going forward. One potentially positive aspect is the IRS's ability to execute longer-term projects for transforming its infrastructure, as the agency has been previously limited to six- to nine-month projects due to annual appropriations. However, there is a concern that the GOP may continue to chip away at the IRS's annual budget, requiring the agency to divert more funds for operational purposes.

New Challenges for Pending International Tax Framework

In terms of international tax matters, a GOP delegation led by House Ways and Means Chair Jason Smith had plans to discuss the pending international tax framework with the Organization for Economic Cooperation and Development (OECD) in Paris, but this has likely been delayed as the result of Congress's focus on passing the debt deal. Nonetheless, the GOP's proposed legislation gives them new leverage to oppose the 15 percent global minimum tax that the OECD has been working on for years. While the proposal is unlikely to be enacted under the current Democratic-controlled Congress, it could become a real threat if a Republican administration takes office in 2024.

Trouble with Enforcement of the Foreign Account Tax Compliance Act (FACTA)

FACTA has been instrumental in helping the IRS crack down on tax evaders, hiding unreported income generating investments in foreign countries. However, the law faces challenges, with the Association of Accidental Americans filing 23 complaints with European data authorities, questioning FATCA's legality. A recent win in Belgium ruled that transfers of information belonging to "accidental Americans" under FATCA are illegal under EU law, allowing the association to press its case alongside other countries. Accidental Americans are individuals who have U.S. citizenship but have never lived in the country, and they are now facing issues with foreign banks threatening to close their accounts in fear of U.S. sanctions, causing distress for those who were not aware of their tax obligations to the IRS.

How is the IRS Budget Allocated?

The IRS allocates its budget to support various key functions and initiatives. One major aspect is improving taxpayer services, where funds are allocated to enhance customer support and assistance. This includes providing resources for taxpayer education, helplines, and online services to simplify the tax filing process for individuals and businesses.

Another important area of budget allocation is upgrading the IRS's information technology (IT) infrastructure. Funds are dedicated to modernizing IT systems to improve data security, streamline processes, and efficiently handle increasing volumes of tax-related information.

Enforcement efforts also receive a share of the budget to combat tax evasion and fraud. This includes funding for audits, investigations, and compliance activities aimed at ensuring individuals and businesses accurately report and pay their taxes.

Furthermore, the IRS allocates funds to expand enforcement efforts focused on complex partnerships and large corporations. These initiatives target entities with intricate financial structures that may require specialized expertise to ensure tax compliance.

Finally, the budget also considers the IRS's long-term plans. While specific figures were not provided, the agency projects increased spending over the years, leading to potential funding shortfalls in the future if spending plans are not adjusted or if Congress does not provide additional funding.

If You Need Help with a Tax Issue, Call Our Dual-Licensed Tax Lawyers & CPAs Today

Seek help from our experienced Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295.

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