By Richard Rubin

WASHINGTON -- The Internal Revenue Service's beefed-up enforcement fund -- initially intended to last about a decade -- could run dry in 2025 after budget cuts and a quirk in congressional funding that Biden administration officials are hoping to address before they leave office.

Due to language in the current law governing federal spending, about $20 billion of the agency's remaining enforcement funding is effectively frozen right now, beyond an earlier bipartisan agreement that clawed back a separate $20 billion in enforcement funding, the Treasury Department said. Deputy Treasury Secretary Wally Adeyemo said it was essential that Congress resolve that problem quickly in its next spending bill by allowing the IRS to have access to the frozen funds.

"Our concern right now is that because of this risk to the IRS and the uncertainty of it, the IRS is going to potentially have to make dramatic decisions about stopping hiring," he told reporters Tuesday. "They are running low on enforcement dollars today."

Congress faces a late December deadline to fund the federal government, with lawmakers then expected to kick the deadline into next year. Clarifying the fate of the IRS's frozen $20 billion could become a sticking point in talks between President Biden, who is on his way out of office, and congressional Republicans, who will have even more power next year to reduce IRS funding when they control both the Senate, House and White House.

Without the enforcement money, the IRS would likely do 2,000 fewer audits of large corporations over the next five years and 6,000 fewer audits of high-income individuals, Adeyemo said.

The IRS money was already likely under threat as Republicans prepared to take full control of the government next year, but that threat is now accelerating and the dispute is now in the mix for this year's lame-duck session of Congress.

In 2022, when they controlled the House, Senate and White House, Democrats passed nearly $80 billion in IRS funding on top of the agency's annual budget. That was intended to last about a decade, letting the agency hire auditors, revamp its technology and improve taxpayer service. Most of the money -- $45.6 billion -- was dedicated to enforcement, the most politically controversial part of the IRS.

Once Republicans took over the House last year, they started trying to pare back the IRS money, arguing that the tougher enforcement would be too intrusive on Americans. They succeeded in deals with President Biden, getting $1.4 billion clawed back and then another $20 billion in fiscal 2024, which ended Sept. 30.

Republicans and Democrats didn't agree to any further cuts, and that left about $24 billion in the enforcement bucket. The IRS has been spending that money gradually as it brings on new staff. As of June 30, it had used less than $1 billion of the enforcement funding, according to an inspector general's report, and the agency was planning to spend $20 billion from fiscal 2026 through 2029.

Then, when Congress wrote the stopgap funding bill that's keeping the government open through Dec. 20, that legislation kept the prior year's language, effectively repeating the $20 billion enforcement cut. Congressional Republicans told the industry publication Tax Notes that this was part of an intentional strategy and that they tried not to call attention to it before it kicked in.

Unless Congress explicitly exempts the $20 billion cut, it would be part of future fiscal 2025 temporary spending bills, Adeyemo said. A full-year spending bill, which Congress is likely to write eventually, would need to explicitly specify any cuts.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

November 26, 2024 12:00 ET (17:00 GMT)

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