With additional IRS funding all but gone and annual enforcement budget cuts, tax experts discussed how the agency might allocate its limited enforcement resources going forward.
Enforcement Funding Recap
Boosting IRS enforcement was a focus when the agency received additional funding under the 2022 Inflation Reduction Act. “A big portion of the $80 billion funding boost was supposed to be for enforcement – over half of it,” noted Janet Holtzblatt of the Urban-Brookings Tax Policy Center. However, much of that $80 billion has since been rescinded.
And the fiscal year 2026 appropriations bill currently before Congress would reduce the IRS’ annual enforcement budget to $4.999 billion, almost half a billion dollars short of the fiscal year 2025 operating plan.
Also on the line during the ongoing appropriations process is a rescission of $11.66 billion in Inflation Reduction Act funding for IRS operations. “That also has implications for enforcement,” said Holtzblatt, speaking during a January 22 Bipartisan Policy Center briefing. “That money was going to be used in part, not only to aid in taxpayer services, but also to improve … detection, so that you were choosing the right people to audit,” she explained.
The Congressional Budget Office (CBO) estimates the $11.66 billion rescission will reduce revenues by $38.6 billion in 2026 – 2035. The reason, CBO explains, is an anticipated drop in enforcement actions, leading to reduced revenue collection.
The Bipartisan Policy Center’s Andrew Lautz said, in his view, “in terms of the deficit impact per dollar rescinded, the impacts are growing with each rescission.” The reason, he added, is that the “CBO assumes that it cuts into higher and higher ROI.”
Future of Enforcement
Holtzblatt predicts a shift in the IRS’ enforcement targets going forward. “I think that the efforts to expand enforcement for the complicated returns is pretty much stalled,” she stressed. Beyond the funding cuts, IRS staffing reductions over the last year mean there are fewer agency employees to work on these “sophisticated” returns.
Many IRS employees working on complex return audits were probationary, added Holtzblatt. In addition to being targeted during initial staffing cuts, these employees “also largely “have better career opportunities outside the IRS,” she explained.
Where things might intensify, said Holtzblatt, is enforcement “geared to people who have invalid SSNs.” She also suspects there could be additional enforcement action against certain taxpayers based on information provided to the IRS from Immigration and Customs Enforcement.
And going forward, enforcement may come in the form of correspondence audits, which Holtzblatt described as “much lower cost.” However, these audits still require a certain level of staffing at the now-diminished IRS.
To understand how the IRS is actually shifting its enforcement strategy with diminished funding, Holtzblatt recommends looking at audit rates. She predicts the drop in enforcement funding will impact not only the number of audits, but also the number of successful audits.
Something else to watch is no change rates, said Holtzblatt. No change rates basically boil down to whether the taxpayer prevailed in a dispute with the IRS. “If we see an increase in the no change rate, I think that would be indicative that the IRS is folding,” she added.
OBBB Impacts
Complicating the picture are the many new tax provisions in effect beginning in 2025 after the passage of the One Big Beautiful Bill Act (OBBB). The IRS has provided some initial guidance on provisions including the tips, overtime, and auto loan interest deductions. However, more will be needed given the law’s complexity – as well as what Holtzblatt described as vague and sometimes conflicting provisions.
For 2025, the IRS has waived certain reporting requirements. But these waivers, she added, largely benefit businesses, employers, and auto dealerships – not those seeking to claim the temporary, new deductions. And she stressed the importance of third-party reporting data for tax enforcement.
Holtzblatt predicts there will be “questions and confusion” about who qualifies for these new deductions – and how large of a deduction they get. “The lack of reporting requirements is really going to leave it in the hands of the taxpayer and perhaps their preparer, who’s also perhaps confused by this,” she added. In terms of how closely taxpayers align with the OBBB and preliminary guidance, Holtzblatt said “it will be a very long time before we have compliance data.”
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