IRS Analysis: Inflation Reduction Act Funds to Raise More Revenue Than Expected

In a new white paper, the IRS boasted that modernization and enforcement efforts funded by the approximately $80 billion appropriation from the Inflation Reduction Act (PL 117-169) are now estimated to bring in $350 billion more than previously estimated.

Titled “Return on Investment: Re-Examining Revenue Estimates for IRS Funding” (Publication 5901), the updated estimate released February 6 claims that “as enacted, the [Inflation Reduction Act] would raise $561 billion” over the period fiscal year 2024 to fiscal year 2034. The IRS’ previous methodology projected a $211 billion return on investment (ROI) over the same period if those investments were not sustained after depletion. If staffing levels were to be sustained after the funds ran out, the prior forecast bumped this figure to $390 billion.

“This conservative method produced revenue estimates limited to the revenue directly attributed to new enforcement hires using data on enforcement activities from the recent past,” read the paper. “[I]t does not adequately capture the impact of transformational investments designed to change the way the IRS operates and their associated impact on tax revenue.”

Yet, under “the most comprehensive approach, the IRA investment, if sustained, will raise $851 billion over FY 2024-2034, which is more than double the estimates from the previous, overly conservative ROI estimation process,” according to the analysis in describing the upper bound of the new forecast.

The new model factors in agency-wide transformational efforts to both enable voluntary compliance and target high net worth individuals, partners, and businesses for compliance enforcement to close the tax gap, or the total difference between taxes owed and taxes paid across all taxpayers. In fiscal year 2021, the tax gap was $688 billion, or 15%. Projects outlined in the IRS’ Strategic Operating Plan released last year are accounted for in new “revenue benefit” categories that were not used before, such as how improvements to customer service or IT systems will promote transparency and more accurate data analytics.

It is uncertain, though, how much of the original appropriation the IRS will actually retain over the next few years. Since the Inflation Reduction Act’s enactment, there have been numerous attempts by Republican lawmakers to rescind, fully or partially (namely the enforcement portion) the authorized $80 billion either through stand-alone legislation or larger appropriations bills.

The Fiscal Responsibility Act of 2023 already clawed back $1.4 billion. As part of debt ceiling negotiations last summer between President Biden and then-House Speaker Mike McCarthy, the enforcement funds (which total over half of the funding) would be reduced by $10 billion in fiscal year 2024 and again by another $10 billion the next year. During the latest round of government shutdown aversion talks, a spending framework came into play that would accelerate the IRS clawbacks so all $20 billion would be rescinded in fiscal year 2024.

“A $20 billion rescission would reduce revenues by over $100 billion,” read a Treasury release accompanying the white paper. “While the IRS would still be able to ramp up enforcement against big corporations and wealthy taxpayers who do not pay what they owe in the next several years, the rescissions would cause IRA enforcement funding to run out in 2029 — about two years earlier than it would have under the IRA as enacted — reducing the revenue raised in 2029.”

For more on the IRS analysis and the battle over funding clawbacks on the Hill, see here for additional coverage from Reuters.