IRS faces $20B cut from modernization fund under debt ceiling agreement

The IRS is facing substantial cuts to funds meant to rebuild its workforce and modernize its legacy IT systems over the next decade, as part of a deal to raise the debt ceiling and avoid a first-ever government default.

The White House and congressional Republicans reached a final agreement Sunday night to limit federal spending over the next two fiscal years, in exchange for raising the debt limit through January 2025.

Congress still needs to pass the spending plan by June 5 to avoid a federal default. That’s about how long the Treasury Department estimates it still has enough revenue on hand to make scheduled payments, without having to borrow additional funds.

The spending deal struck by the Biden administration and House Speaker Kevin McCarthy (R-Calif.) would keep non-defense discretionary spending roughly flat in fiscal 2024, and would cap growth in non-defense spending to 1% in FY 2025.

White House officials told reporters on Sunday night that the spending deal, if approved by Congress, would amount to a full-year continuing resolution for non-defense discretionary spending in fiscal 2024. They also said proposed cuts to IRS spending wouldn’t require the IRS to scale back its short-term modernization plans.

“This reflects the fact that we are in a divided government, where we were obviously going to fight hard for higher non-defense funding for a range of priorities that are critical to the president’s economic and broad agenda,” a White House official said. “We will continue to do that. But in a divided government, we’re not going to get the kinds of [non-defense discretionary] increases that we would hope to get.”

White House officials also said agencies fare better under this deal than an earlier plan by House Republicans to cap next year’s non-defense discretionary spending at FY 2022 levels.

The Biden administration estimated that plan would have cut non-defense discretionary spending by 22% in FY 2024, and would force agencies to make cuts to the federal workforce.

But the IRS stands to lose the most, out of all agencies, in this new, bipartisan agreement.

The Biden administration and Republican lawmakers are prepared to cut $20 billion from funds the agency received in the Inflation Reduction Act — about a quarter of the nearly $80 billion received to spend over the next decade.

The IRS recently released its Strategic Operating Plan, outlining how it expected to spend its modernization funds. The agency, as part of its plan, expects to make 20,000 new hires by the end of fiscal 2024.

IRS Commissioner Danny Werfel told the Senate Finance Committee last month that plans to zero out IRA funds would unravel IRS plans to improve taxpayer services.