Key Points

  • The Biden administration plans to allocate an additional $104 billion to the U.S. Internal Revenue Service (IRS) starting in 2026. IRS Commissioner Daniel Werfel stated this would generate approximately $341 billion in additional tax revenue over a decade, primarily driven by stricter enforcement actions.
  • Werfel testified before the Senate Finance Committee on Tuesday, stating that the IRS needs these funds to maintain current and future work effectiveness and address the challenges of rising economic complexity.
  • Werfel noted that thanks to increased funding from the 2022 Inflation Reduction Act, the IRS expects to raise $700 billion over ten years through enforcement actions targeting delinquent "millionaires and billionaires," complex partnerships hiding income, and companies shifting profits to overseas tax havens.

In-Depth Analysis

Republican lawmakers, in this year's spending agreement, forced President Biden to cut $20 billion from the $80 billion IRS funding approved under the 2022 IRA. A joint study by the Treasury Department and the IRS shows that the $20 billion cut would result in a loss of over $100 billion in tax revenue over the next decade. In contrast, the Congressional Budget Office (CBO) offers a more conservative projection, estimating the $20 billion cut would reduce revenue by $44 billion and increase cumulative deficits by $24 billion over ten years.

Senate Finance Committee Chair Ron Wyden, an Oregon Democrat, warned at the hearing: "If Congress continues to cut IRS funding—or if the IRA funding expires and Congress doesn't replenish it—we know what will happen." He stated, "Wealthy tax cheats will find it easier to evade the law, while ordinary American taxpayers will face pain and higher costs when fulfilling their civic duty each spring during tax season."

Treasury data shows that during the period of IRS funding cuts from 2010 to 2019, audit rates for large corporations and wealthy taxpayers fell by more than 50% and 70%, respectively. Meanwhile, the annual tax gap—the difference between taxes owed and taxes paid—swelled to $688 billion in the 2020-2021 tax years.

Werfel stated that the requested $104 billion in additional funding would go toward the IRS's "base budget," which he said has remained largely unchanged since 2010. Given the increase in the number of taxpayers, updates to tax laws, and the emergence of "gig" employment, the current base budget is "no longer sufficient to serve today's tax system."

"What we're asking for is essentially establishing a new baseline so the tax system can continue to evolve," Werfel said. "This is not about constantly asking for more money to build an ever-expanding IRS."

Werfel also mentioned that the IRS is updating and streamlining operations under a "modernization budget," but under current legislation, that budget will begin to dry up in 2026. "If you look at 2026, we will completely lose the ability to maintain services; if you look at 2028, 2029, we will lose the ability to maintain technology because there's a cliff." He explained that the $104 billion supplemental funding "is precisely to address the cliff issue in the coming years."

The IRS Commissioner's remarks drew pushback from Republicans, including the committee's senior member, Senator Mike Crapo of Idaho. Crapo noted: "Despite claims that the $80 billion in new funding would 'transform the IRS into a 21st-century agency,' the President's budget request suggests otherwise." He directly challenged Werfel: "When does it end? When does it stop?"