AYESHA RASCOE, HOST:
The Internal Revenue Service says - and analysts agree - that it's been chronically underfunded and understaffed. It received one of its biggest funding boosts when President Biden signed the Inflation Reduction Act two years ago, but key modernization funds dry out by 2026. And as Republicans take control of the White House and Congress, what will happen to the IRS? That's the question we put now to Janet Holtzblatt. She's a senior fellow at the Urban-Brookings Tax Policy Center, and she joins us now. Welcome to the program.
JANET HOLTZBLATT: Thank you.
RASCOE: Let's go back a little. How great was the need for the $80 billion the IRS did receive under the Inflation Reduction Act?
HOLTZBLATT: The need was incredible. Over a decade or so, the IRS's budget had been reduced by over 20% after adjusting for inflation. At the same time, there had been a seven-year freeze on hiring, which, combined with a lot of IRS employees reaching retirement age, really led to a 20% reduction in overall staffing of the IRS.
And what got hit particularly were those examiners who handled the sophisticated difficult returns. And so what we saw coming from this was a reduction in audit rates amongst the very wealthy, amongst large corporations. And then in combination, you also had a problem that's been going on for years, which is the IRS has not been able to keep up with technology. And in some cases, they were reliant on programming language that dated back to the 1970s.
RASCOE: It's been two years since the Inflation Reduction Act was passed. How has the IRS used these funds so far?
HOLTZBLATT: The IRS took a very important step immediately. They went out, and they hired 5,000 service representatives. Those are the people who answer the phones. Those are the people who process the papers - also ensure that you get your refunds in a timely fashion. So you've seen a surge in improvements in customer service. Now, it's also the case that after they got the money, Congress began to chip away.
RASCOE: Well, yeah. I wanted to get into that because the law provided for the money to be dispersed over 10 years, but more than $20 billion of that has already been clawed back. So with Republicans getting control of Congress and the White House in January, are you concerned that there could be more cuts on the table?
HOLTZBLATT: I think there's a real risk. Back in 2022 when the legislation was enacted, the Treasury Secretary, IRS officials, repeatedly said that compliance efforts were going to be targeted to people with income above 400,000, large partnerships and large businesses. But almost within a week of passage, you had opponents of this increase arguing that the IRS was going to use that money to hire 87,000 agents to go after Walmart customers. And so that sort of set the tone.
RASCOE: What do you think will be the biggest challenge for the agency going forward?
HOLTZBLATT: Even if the money is not cut back further, you could see the phone calls being answered. You could see a drop there. You could see, you know, some issues with refunds and the like. Now, if there's rescissions in the big pool of money, what the IRS has gotten started on, you know, in terms of enforcement, in terms of new audits that has already begun, in terms of paying the salaries of the new people they've hired, I - you know, that's the big unknown. Do those efforts that have started since IRA - do they collapse? Do those people retain their jobs? Does the IRS continue to be able to follow through with the modernization of its antiquated, you know, technology? That's the big uncertainty going forward for the IRS.
RASCOE: What's at stake if the IRS can't collect all the taxes that the law says it should? I mean, we know gas taxes pay for highways, and the local sales tax goes to your local parks and sidewalks. So what happens if the IRS can't collect the taxes that it should?
HOLTZBLATT: The money pays for our defense system, our Social Security benefits, Medicare, for Medicaid, higher education, for a range of services that maybe we take for granted because we've had them for years. But when you are not getting the money that you owe, then the government has three options, none of which are going to be popular. One is to raise taxes. One is to cut into those programs that we've all become so dependent on. And the third is to borrow money.
Borrowing money is not free. It forces interest rates up as the government competes with other private sector for the same money. It also has that perverse effect of increasing the deficit because the interest payments have to be made. So yeah, we want the taxes to be collected. But there is reality in that it's also costly to collect taxes as well.
RASCOE: That's Janet Holtzblatt of the Urban-Brookings Tax Policy Center. Thank you so much for being with us.
HOLTZBLATT: Thank you for having me. Transcript provided by NPR, Copyright NPR.
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