Tax Reform Under Fire: Will Trump’s Return Mean a Scaled-Back IRS?
The Biden administration’s ambitious plan to supercharge the Internal Revenue Service (IRS) with billions in extra funding and bold audit targets aimed at rich taxpayers is facing a new challenge. Capitol Hill maneuvers on funding may preview a scaled-back role for tax auditors as Donald Trump returns to the White House and Republicans take Congress next year.
A Shift in Priorities
Trump’s team has signaled that they will end “bureaucratic overstepping” at the IRS, which could mean a significant reduction in the agency’s enforcement capabilities. In 2022, Democrats passed the Inflation Reduction Act, providing the IRS with $80 billion in funding over a decade, with more than half dedicated to increased enforcement focused on businesses and wealthy households making at least $400,000. However, Republicans have been critical of the potential for waste and overreach, and have targeted the enforcement money.
Funding Freeze Looms
Due to wording on laws that have temporarily averted a government shutdown, $20 billion in IRS funding is potentially bound for a freeze, according to Democratic lawmakers and Treasury officials. This follows a 2023 debt-ceiling deal that already steered roughly $20 billion away from the agency. Without the $20 billion, there could be 8,000 fewer audits of rich people and corporations from 2025 to 2029, and IRS workers would be able to answer far fewer customer-service phone calls, leading to longer wait times for taxpayers with questions.
A Change in Approach
Republican observers believe that the IRS budget will be reduced, with a focus on better technology and customer support, but a substantial cutback on enforcement and overhead costs. The incoming Trump team wants to shift the IRS’s mentality from being the “tax police” to a customer-service agency, with a focus on helping people do their taxes. This approach would assume that taxpayers are innocent until proven guilty, rather than the current assumption of guilt until proven innocent.
Consequences for Taxpayers
The potential loss of $20 billion in funding could have significant consequences for taxpayers. The federal government’s financial health could be impacted, with a nearly $700 billion gap between taxes owed and taxes actually paid during 2022. Compliance efforts currently rake back $90 billion, and a reduction in enforcement could lead to a decrease in revenue.
A New Direction for the IRS
The Trump administration will need to decide how to put its stamp on the IRS, which may take time. Trump’s Treasury Secretary pick, Scott Bessent, will oversee the IRS, and the agency’s commissioner, Danny Werfel, will need to adapt to the new direction. The role of the IRS commissioner is a presidential appointment, and Werfel’s term runs through November 2027.
Experts Weigh In
Tax experts are concerned about the potential repeal of the long-term funding for the IRS, which has been transformative for the agency. A resilient IRS staff will need to adjust to the new funding levels, potentially relying more on technology if staffing levels are constricted. However, politicians weighing in on audit approaches can create problems, and a shift in focus towards the middle class could lead to easier audits rather than the sophisticated scrutiny needed for complex tax returns.
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