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The Revolving Door Project, a Prospect partner, scrutinizes the executive branch and presidential power. Follow them at therevolvingdoorproject.org.
For the second straight year, President Biden and the Democrats are poised to sacrifice a significant chunk of one of their biggest accomplishments: funding for the IRS to go after wealthy tax cheats. With the latest maneuver, more than 90 percent of the money invested to scale up IRS auditing and oversight could be gone before it can even be used. Yet again, Democrats seem to have been outplayed by Republican leadership.
In 2023, to appease then-Speaker Kevin McCarthy and get an extension of the debt limit, Biden agreed to an untenable set of spending caps for fiscal years 2024 and 2025 in what became known as the Fiscal Responsibility Act (FRA). In order to keep spending levels roughly flat in nominal terms (which, due to inflation, is functionally a cut in actual spending power), Biden also struck a “side deal” allowing Republicans to claw back $20.2 billion of the $46 billion in Internal Revenue Service enforcement funds provided by the Inflation Reduction Act (IRA), on top of $1.4 billion already sacrificed in the main FRA deal. In budget-speak, this is called a “rescission.”
In September, when Congress was unable to pass a budget for fiscal year 2025, it instead passed a continuing resolution (CR), which temporarily extends the most recent set of spending instructions. Because the preceding appropriations package instructed the IRS to hand $20.2 billion back, the September CR did as well—almost doubling the potential cut to the IRS. As a result, those funds have been frozen, raising the total stakes of the FRA to $41.8 billion less for the IRS to modernize its aging systems and go after rich scofflaws.
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With that September CR expiring Friday, lawmakers raced to pass another to fund the government through mid-March. The new 1,547-page CR, released Tuesday night, did not include a fix unfreezing the IRS’s imperiled enforcement funds. With Donald Trump and a Republican majority in Congress taking over in January, they can make the rescission permanent in a final spending package.
Because every dollar spent auditing wealthy tax-dodgers nets a return of up to $12, the “savings” of $41.8 billion in IRS funding will actually cost the government as much as $460 billion on net over time.
In the short window of increased funding, the IRS made great strides, including updating massively out-of-date computer systems (multiple sources told me that the IRS had only recently been able to upgrade from an Apollo-era mainframe that had been around since the late 1960s). But the agency still isn’t fully back in fighting shape after decades of neglect.
Despite the high stakes involved in this fight, including whether the IRS will be able to continue to audit high-wealth tax-dodgers, there has been little in the way of detailed reporting on the struggle to avert another costly clawback. Over the past two weeks, reporting for the Prospect, I interviewed 14 progressive tax policy experts involved in the effort to protect IRS funds (many of whom requested anonymity to speak candidly). What follows is an in-depth look at the current chapter in an ongoing battle to fend off Republican attempts to hollow out the IRS.
What Happened?
The story starts back in 2022, when Republicans won a narrow majority in the House. In order to secure his position as Speaker, Kevin McCarthy had to make serious concessions to his party’s right flank, the House Freedom Caucus, including allowing the Speakership to be challenged by a single member.
In autumn of 2023, after successfully goading Biden to accede to major budget cuts, McCarthy attempted to renege and push through a package of even steeper spending cuts and harsh border policy to appease his right flank, only to be blocked by the same right flank. Democrats accused House Republicans of breaking the deal they made with President Biden, while McCarthy insisted that the limits he negotiated with Biden were a maximum and that spending below that ceiling was entirely in bounds. However, several moderate Republicans defected and joined Democrats to vote down the proposed spending package.
Subsequently, McCarthy passed a temporary bipartisan spending bill, mostly with Democratic votes, that more closely matched the reported contours of his deal with Biden. Matt Gaetz—former Florida congressman, alleged sex-trafficker, Venmo aficionado, and failed attorney general nominee—subsequently accused McCarthy of working with Democrats over his own party and filed a motion to vacate the Speakership. McCarthy lost that vote.
His successor, Mike Johnson, wound up being similarly reliant on Democratic votes to pass a spending package, resulting in another spending deal between Johnson and Senate Majority Leader Chuck Schumer in spring of 2024. This deal remained largely in line with the Biden-McCarthy side deal, but with an important twist. Johnson insisted that the $20.2 billion rescission of IRS enforcement funds go into effect all at once in fiscal year 2024, rather than the previously agreed upon $10 billion in 2024 and $10.2 billion in fiscal year 2025.
In September, it became clear that Congress was not going to be able to pass a 2025 budget before October 1, the start of the new fiscal year. At that point, everyone got to work on a short-term continuing resolution that would fund the government until December. Functionally, any short-term CR just extends the previous instructions about how the government gets to spend money. Because the previous set of instructions required the IRS to give back $20.2 billion, so did the September CR. The normal fix for this type of problem is to attach an “anomaly” to the CR that changes the outdated instructions. In theory, this is a routine matter of the White House Office of Management and Budget (OMB) submitting a list of requested anomalies, talking through them with congressional appropriators, and then attaching them to the CR.
But the fight over an anomaly to protect the IRS enforcement money has not been routine. In September, Congress passed a CR without the anomaly after Democrats had been assured the IRS had sufficient funding to make it to December.
Inside the Fight
Every expert I spoke to agreed it is vital to prevent another IRS rescission in advance of a major fight over the expiring Trump tax cuts. Anna Aurilio, senior campaigns director at the Economic Security Project, told me the IRS’s funding was helping address America’s vast economic inequality and that “the stakes are dire.”
“The IRS’s Inflation Reduction Act funding has allowed the agency to make much-needed improvements to better serve the American people and focus on ensuring the wealthy pay what they owe,” said Susan Harley, managing director of Public Citizen’s Congress Watch division. “We must not go back to the times when the IRS was so starved for resources that millionaires cheated on their taxes without repercussions.”
In response to questions about the agency, Rep. Rosa DeLauro of Connecticut, the ranking Democrat on the House Appropriations Committee, released a statement saying, “Cuts to IRS enforcement are one of the many ways that Republicans shovel tax breaks and giveaways to big corporations, billionaires, and tax cheats.”
Sen. Elizabeth Warren, who championed including IRS modernization in the IRA, said: “For years, Republicans in Washington have attacked IRS funding, exploding the deficit and protecting their rich tax-dodging buddies. The IRS needs more—and more stable—resources to do its job for the American people.”
According to a Treasury Department press briefing, cutting IRS funds will result in higher deficits, worse taxpayer service, and a shift back to disproportionately auditing lower- and middle-income filers. David Kass, executive director of Americans for Tax Fairness, agreed. Auditing working-class filers was “highly possible [as] it’s much easier to go after people who don’t have complicated returns,” he said. (Full disclosure: The Revolving Door Project participates in the ATF coalition.)
Kass also flagged the risk of reversing major improvements to IRS customer service, where the percentage of answered calls rose from a pitiful 18 percent to 90 percent following the IRA investment, while call wait times dropped from 29 minutes to just four.
The experts I consulted were divided on the question of whether Republicans will attempt to cut IRS funding even more during later budget negotiations. On the one hand, the party is clearly hell-bent on enabling wealthy tax cheats. On the other, the GOP also wants to preserve or even expand on the Trump tax cuts for the rich next year, which will be hard enough with their tiny majority. Because of the return on investment in tax enforcement, gutting the IRS will make that harder to pay for in reconciliation, said Sarah Christopherson, an independent tax policy expert.
Other potential sites for reconciliation disagreements include the expiring state and local tax (SALT) deduction and the need for a debt ceiling increase. Christopherson emphasized that, because of this dynamic, “Democrats should not be doing them any favors” that could make Republicans’ balancing act easier by allowing rescissions under the regular budget process.
Everyone I spoke to agreed that the ideal outcome would have been to attach an anomaly now, to set the tone heading into next year. “It sends a very bad signal if Democrats don’t put up a fight,” Christopherson said.
Can Democrats Stand Up for the IRS?
The broader question is whether Democrats can put up a unified front defending IRS funding as part of a general attack on Republican pro-rich tax policy. Many are sounding the right notes. Elsewhere in her statement, Rep. DeLauro said: “I am fighting to protect every dollar for the IRS and support efforts to pursue back taxes owed by delinquent millionaires, billionaires, and the biggest corporations—tax cheats who are hurting hardworking and honest American families.”
But much of the rest of the party has not been so consistent. It was Biden and Schumer who helped create this problem by giving in to Republican hostage-taking, and there has not been much public messaging from party leadership about this issue.
Indeed, even some of the experts I spoke to said they were blindsided by the rescission. Both Aurilio and Christopherson told me that they, and most of their allies, were caught unaware and only learned that it would happen when OMB requested an anomaly to address the issue. One expert told me that they had been informed in the summer but had been urged by Democratic Senate leadership not to discuss it in an attempt to keep congressional Republicans from noticing that they could freeze $20 billion just by demanding a clean CR. (Senate Majority Leader Chuck Schumer’s office did not respond when asked for comment.) One other advocate mentioned they had discussed the issue with some congressional appropriators, but no one else indicated any effort to obfuscate the anomaly process or to try and pull one over on Republicans.
Another source said that it was “incredible how uncoordinated and disjointed the administration’s response has been internally across NEC, OMB, IRS, Treasury. And their message to Congress has been contradictory.”
One expert expressed discouragement over their sense that the Biden administration was not doing enough and that the mantle of defending investments in the IRS had fallen too much to nonprofits. They said that what they had seen was “an absolute abdication of duty by OMB.”
I was also told by several people familiar with the push for the anomaly that congressional appropriators were annoyed by a lack of timely responses. One discussed a meeting months ago where Sen. Patty Murray, chair of the Senate Appropriations Committee, had requested operational data about the impact on IRS operations from Treasury Secretary Janet Yellen, which was only received early in the week of Thanksgiving. Another source had also heard this story. (Sen. Murray’s office declined to comment.)
That said, a senior administration official, who spoke to me after I reached out to OMB for comment on these characterizations, disputed this account. They said that “Treasury and OMB were immediately on the same page” about requesting the IRS anomaly. Democrats did, however, agree to the September CR without any anomalies after Republicans demanded a “clean” funding extension with no modifications. One source familiar with the process said that, based on the IRS’s requested budget plan, congressional appropriators were confident that a short term CR through December would not impact operations. According to them, the IRS requested $2 billion from the IRA modernization fund, and OMB approved roughly that amount, so a freeze wouldn’t matter immediately.
This senior official confirmed that the most granular data on IRS operations had been sent to lawmakers shortly before Thanksgiving, but argued this exchange was part of steady back-and-forth between appropriators and the administration where information was shared “as requested and as available” in a “standard and well-worn process.” In response to questions about information sharing, a Treasury Department official said the administration had been in constant communication on the matter, both internally and with Democrats in Congress.
Lasting Legacy
It is peculiar that the Democrats haven’t been able to come out guns blazing in defense of the IRS. The IRA is arguably the defining achievement of Biden-era Democrats. That’s why President Biden’s legacy essay in The American Prospect outlining his economic-policy record features a boast about the revitalization of the IRS. And while many of Biden’s policies won’t be fully felt for years to come, the impact of modernization at the IRS has been immediate.
In only two years, experts told me that the call response rate at taxpayer services has quintupled, even as wait times fell by 80 percent, and that the IRS had recovered over a billion dollars owed by rich taxpayers. That figure has since ballooned to $4.7 billion. And, remember, this is with half of the investment from the IRA being either rescinded or frozen with an uncertain fate, and a modernization program that has barely started.
It was a great accomplishment. But you wouldn’t know that from how Schumer and Biden have treated their hard-won spoils.
They’ve used the IRS enforcement investment “as a piggy bank, when they should have treated it as a scarce nonrenewable resource,” according to Christopherson.
Christopherson told me that Biden’s debt ceiling deal with McCarthy “was a big strategic error that has only become more obvious in retrospect.” “When we heard that Biden and McCarthy had reached this deal, we were stunned and extremely disappointed,” Aurilio similarly said of herself and her colleagues.
According to multiple sources familiar with appropriations, Schumer’s gift of front-loaded rescissions created a hole in the fiscal year 2025 toplines—which several told me they expect Republicans to use to justify further IRS clawbacks—and opened the door to additional cuts, as from Republicans’ point of view, the deal is already over.
Neither Sen. Susan Collins, ranking Republican on Senate Appropriations, nor Rep. Tom Cole, chair of the House Appropriations Committee, responded when asked for comment.
In a few short weeks, a new Republican Congress and president will be sworn in, and they will finally be able to try and rescind the IRS money for good. They could do so in a reconciliation package, which would circumvent a Democratic filibuster in the Senate, or in a spring appropriations package, whether a budget or a CR for the remainder of the fiscal year.
Either strategy will open opportunities for Democrats. If the GOP attempts to do it in reconciliation, for instance, it will limit their options, because such a bill must be deficit-neutral over four years, requiring other pay-fors that some Republicans may not like.
Some experts believe that the fiscal tightrope Republicans will have to walk means that Democrats can afford to wait until mid-March, when the next CR is set to expire, to make their stand and demand that the $20.2 billion stays.
But to exploit these opportunities, Democrats will have to develop a firm line on the issue, and start making noise about it. This is why many advocate tax experts felt strongly that Democrats had to maintain a united front and insist on an anomaly—to cement the party line and build momentum. So far, that isn’t happening.
