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A border adjustment works by levying a tax on imports and giving a rebate on exports. Under a carbon tax, an ideal border adjustment would cover all goods based on their carbon content. However, it may not be administratively feasible to border-adjust all goods. Existing carbon tax proposals typically only make certain products eligible for border adjustment. For example, primary products such as aluminum tend to be eligible for border adjustments, but not consumer goods, such as cars.40 Border-adjusting primary goods but not consumer goods might incentivize companies to shift their production overseas to avoid taxes. A simple example below explains how this could happen. Assume there were a domestic carbon tax in the United States with border adjustments that only covered primary goods (e.g., steel), but not consumer goods (e.g., cars). A manufacturer could export steel overseas to get an export rebate, make a car using the steel in a country with no carbon prices, and then import the car back into the United States without paying any import tax for the car. In this scenario, the manufacturer takes advantage of the narrowly-based border adjustment mechanism to avoid paying the carbon tax for both the steel and the car, even though the car is sold for domestic consumption in the United States. Border-adjusting imported and exported goods is not easy, as the regulator needs to determine the carbon emissions associated with imported and exported goods, which are not readily observable.41 One way to design a carbon tax’s border adjustment is to develop an administrative structure similar to that of a VAT. A VAT is “paid in stages by producers along the production process. Each producer’s VAT liability is equal to their sales times the VAT rate minus any VAT previously paid on the inputs to production.”42 Much as under the administrative structure of a VAT, a border adjustment under a carbon tax would require a mechanism for businesses to track the carbon emissions added at each stage of the production process so it could ultimately be rebated at the border.

CLC proposes a border tax adjustment, with fees imposed on imports from nations "without comparable carbon pricing systems," and with rebates to exporters for sales into nations without such policies. It is not clear from the CLC discussion how the tax adjustment would be implemented in the case of nations without carbon pricing systems, but with regulations, or subsidies for such alternative energy sources as wind and solar power, or other policies that are purported to reduce GHG emissions.22 Such adjustments for nontax policies would be complex indeed, requiring an estimate of the tax- equivalent value of the given policies under examination. Does the CLC believe that the bureaucracies producing these estimates will be unpressured to adjust them in various directions depending on which interests are being affected? The larger problem, also ignored by the CLC, is that of the international supply-chain phenom- enon: Goods imported from a given nation are likely to embody components and other inputs from other nations—perhaps many other nations—in vastly differing proportions, and those nations' policies on GHG emissions almost certainly will vary considerably. The border adjustment would have to estimate transfer prices—always a subjective and problematic calculation—and the effects of shifting exchange rates, changing input proportions, and a host of other complexities in order to arrive at a border adjustment fee or rebate for a given economy. And even that is an abstraction that shunts aside various political pressures that inexorably will be felt and incorporated. This means that a new bureaucracy, or perhaps an expanded one at the Internal Revenue Service, will have a vast amount of work to do, with important implications for the allocation of resources. So much for the CLC claim that this policy would streamline "the regulatory state" and shrink "the overall size of government," to which we now turn.

Aside from Congress hacking away at the agency, there are other ways the agency can be undermined. “House Republicans … figured out [in the 1990s] that if they couldn’t get their really aggressive tax-cutting plans enacted under the Clinton administration,” Gardner said, “short of that, they could hold a bunch of hearings designed to kneecap the Clinton administration’s tax-collecting capabilities.” Gardner continued: “It really put a chill on the willingness of IRS leadership to enforce the law. The public perception was out there that the agency was overstepping its authority.”

The IRS has never been a popular cause on Capitol Hill. But Democrats and Republicans long shared a grudging consensus that the agency’s basic work of tax collection deserved protection. That changed when the Republican Party came into power in 1994 and Newt Gingrich became the speaker of the House. The new majority’s main priority was tax cuts, and vilifying the IRS helped its case. Some conservatives favored a “fair tax,” a consumption tax based on purchases. Proponents said that this simplified approach to taxation would allow them to “abolish” the IRS. The notion wasn’t a fringe position within the party. Former Sen. Richard Lugar of Indiana, a respected mainstream Republican, ran for president in 1996 on a platform of abolishing the IRS. A Republican congressman in 1998 introduced a bill to repeal the Internal Revenue Code by 2002. “Abolish the IRS” remains a potent talking point. Ted Cruz, the Republican senator from Texas, campaigned on the slogan when he ran for president in 2016. In 1997 and 1998, the Republican-controlled Senate held a series of dramatic hearings on alleged abuses by the IRS. Agency employees testified behind black curtains with their voices disguised, like Mafia snitches, to protect their identity. The testimony depicted an organization run amok, with claims of biased examiners and lurid tales of agents in flak jackets storming establishments. One restaurant owner told of a raid to seize business records at the home of an employee, during which agents forced a teenage boy to the floor at gunpoint and made a group of teenage girls at a slumber party get dressed “under the watchful eyes of male agents.” A USA Today headline read: “Witnesses Accuse IRS Investigators of ‘Gestapo-like’ Raids.” Congress followed the hearings with a sweeping overhaul of the agency, limiting the IRS’ collection powers and independence and giving taxpayers new protections. In the Senate, the reform bill passed 97–0, and President Bill Clinton signed it. It was only afterward that the Government Accountability Office debunked the allegations of IRS abuses. “Generally, we found no corroborating evidence that the criminal investigations described at the hearing were retaliatory against the specific taxpayer,” the report stated. “In addition, we could not independently substantiate that IRS employees had vendettas against these taxpayers.” By then it was too late. Reeling from the new law and the public attacks, IRS audits and collections tumbled to historic lows. Recovery took years, but because the IRS wasn’t a locus of partisan warfare during the presidency of George W. Bush, it did happen. By 2010, under the administration of Barack Obama, the IRS’ budget hit its high point: $14 billion in today’s dollars, about $2.5 billion above where it is today. Collections rebounded. But that spring, over unified Republican opposition, Democrats passed the Affordable Care Act. The sprawling health care bill was also, indirectly, a sprawling tax bill, since it relied on the IRS to help administer many of its provisions. Budget cuts have crippled the IRS, allowing tax cheats to run rampant. Listen to Jesse Eisinger on the “What Next” podcast from Slate. In the midterm elections that followed, Republicans took the House of Representatives in a wave similar to that of 1994. The first bill introduced by House Republicans in 2011 was a budget that slashed funding across the government and took special aim at the IRS. In addition to calling for a cut to its budget of $600 million, the bill prohibited the IRS from using any of its funding to carry out key parts of the Affordable Care Act. It didn’t pass. Since then, Republicans have cited the ACA as a reason to withhold funding from the IRS. In 2013, in response to an IRS request for a budget increase, former Rep. Ander Crenshaw, a Florida Republican who then sat on the House Appropriations Committee, said: “Any kind of increase of this magnitude was going to be a challenge for some very basic reasons. There are a lot of objections to the Affordable Health Care Act, a lot of objections to Obamacare.” The agency faces a structural political problem. On one side are anti-tax Republicans, while on the other are Democrats who fear publicly supporting the taxman. “This is an agency that doesn’t have any friends,” said James Dyer, a Republican who worked for years on the House Appropriations Committee staff. “There’s no advocacy on the Hill for them except what they do for themselves.”

THE MOST VISIBLE WAY CONGRESS can sabotage the IRS over the next decade is by simply passing bills that rescind the $80 billion allocated by the IRA. The actual success of those measures is questionable, given that Democrats control the Senate and the White House and just passed this funding last August. A stand-alone repeal of funding from a Republican House would serve as little more than signaling to the public that under a Republican trifecta, that is their priority. However, there are more arcane measures at Congress’s disposal, most prominently the appropriations process. Congress carving away at the IRS’s base funding through appropriations is the slower, less bombastic measure. But ultimately, it is the agency’s most existential threat. In fact, even under a Democratic trifecta, last year’s omnibus spending package cut nearly $300 million from the agency’s budget. So immediately, money from the $80 billion meant to supplement the agency’s existing budget is, in effect, supplanting lost base-level funding. The hypothetical argument from Republican lawmakers to the IRS might be “You got $80 billion. Spend it. You don’t need as much in your appropriations,” said Holtzblatt. “But the $80 billion was premised on the assumption that [the IRS] would continue to get annual appropriations.” The result, Holtzblatt said, is “if you carve out appropriations, you lose the ability to add on to taxpayer services and enforcement.” The stealth attack on base-level funding and a frontal assault on the new funding could happen simultaneously. Republicans could hold government funding, or legislation to increase the nation’s debt limit, hostage to conditions that include peeling back some of the $80 billion. At the same time, the IRS budget could be ground down in appropriations. Republicans could burn the candle at both ends.

Late last month, five (relatively) moderate Senate Republicans reached a bargain on infrastructure spending with five of their Democratic counterparts. A proposed increase in the IRS budget cemented this agreement. Throughout negotiations over the bipartisan package, “pay fors” had been the primary stumbling block. With the GOP religiously opposed to raising taxes on the wealthy, and Democrats disinclined to raise taxes on anyone else, mutually agreeable sources of revenue were few and far between. Then negotiators found a way to increase tax revenue without raising taxes: Every dollar invested in the agency’s emaciated enforcement capacity would lift many more from the pockets of tax cheats. Thus, the bipartisan group’s proposed $40 billion expansion of the IRS budget could plausibly yield $140 billion in revenue — a net return large enough to offset nearly one-fifth of their deal’s $579 billion in new infrastructure spending. But funding the tax police is a bitter pill for the right. Conservatives are not only hostile to the IRS’s core mission, they also consider the agency a serial persecutor of their movement. In recent days, various right-wing nonprofits — including the Koch-backed FreedomWorks — have begun lobbying Mitch McConnell to whip votes against any bipartisan agreement that includes additional funding for the IRS. In order to pass the Senate, the bipartisan deal will need to gain at least five more Republican supporters than it currently boasts. To appreciate how heavy a lift that will be, it helps to understand the right’s official and unofficial grievances with the IRS, and the real and imaginary bases for those complaints. Here’s how the Republican base came to see America’s tax agency as a proto-totalitarian instrument of social control. The right’s semi-legitimate concerns about the IRS Tax enforcement has been a tool of (bipartisan) harassment in the past Few Republicans will publicly endorse anemic tax enforcement as an end in itself. Rather, conservatives typically couch their opposition to IRS funding in concerns about the agency’s corruption. Specifically, they argue that the IRS routinely commits politically motivated abuses of power. This week, Iowa senator Chuck Grassley alluded to such concerns when he suggested that additional funding for the IRS might “come at the expense of taxpayer rights.” The Coalition to Protect American Workers, a conservative group financed by capitalists opposed to Biden’s agenda, portrays the IRS as an army of black-tied, bespectacled clones descending on America’s God-fearing small businesses, in an attack ad as Orwellian as the organization’s own name. Photo: CPAW The American right has plenty of persecutory fantasies that have no basis in fact. But its paranoia about the IRS draws strength from one genuine historical truth: At various points in U.S. history, federal tax-enforcement agencies have been used as political weapons. In the 1930s, Franklin Delano Roosevelt ordered the Treasury’s tax-enforcement branch to engineer charges against Andrew Mellon, the former Republican Treasury secretary and millionaire industrialist. In the 1960s, the IRS helped end the political career of Senator Edward V. Long, who had earned the agency’s ire by holding hearings on its alleged misuse of wiretaps in criminal investigations. According to the investigative reporter William Lambert, an IRS agent leaked him word of a suspicious payment Long had received from an associate of Jimmy Hoffa. After Lambert published a story off that tip — and Long subsequently lost renomination — Lambert says he received a call from then-IRS commissioner Sheldon S. Cohen, offering him the agency’s “congratulations.” In the 1970s, of course, Richard Nixon directed the IRS to hound political organizations he deemed “subversive.” Nonsensical IRS rules for nonprofits invite suspicion and abuse Recent decades have seen fewer instances of documented, top-down corruption. But the tax code’s confounding rules regarding the activities of nonprofits has long invited both politically motivated enforcement actions, and suspicions of the same. Under congressional statute, civic organizations that are “operated exclusively for the promotion of social welfare” — technically known as 501(c)(4) groups — are exempt from federal taxation. Initially, this was understood to prohibit such groups from engaging in political activity, if they wished to maintain their tax-exempt status. But subsequent Treasury Department regulations effectively rewrote the law; under its guidance, a 501(c)(4) can engage in political activity so long as it is “operated primarily for the purpose of bringing about civic betterments and social improvements.” The foundational distinction in this law — between political advocacy and the promotion of social welfare — is logically unsustainable. The impact of government policy on social outcomes dwarves that of independent civic organizations; no charity could have possibly supplied the needy with as much aid as the CARES Act did last year. Ultimately, there is no apolitical definition of “social welfare,” and promoting most conceptions of the general good will necessarily involve political activity. Meanwhile, discerning whether an entity is primarily a “civic betterment” group, which supplements its apolitical work with lobbying and campaign activities — or primarily a political group with a secondary interest in civic betterment — is an inherently tricky task. When a left- or right-leaning group is given or denied tax-exempt status, suspicions of political persecution are liable to arise. In 1989 — eight years into Republican domination of the executive branch — it was often liberals who questioned the IRS’s political neutrality. In an exposé for The New York Times Magazine that year, reporter David Burnham wrote that the agency was “run by a small cadre of senior civil servants” who “have adopted the IRS’s generally conservative view of the world.” In the piece, Burnham recounts a seemingly right-wing IRS agent’s indignant response to the Minnesota Association for the Improvement of Science Education’s application for tax-exempt status. The liberal group had disclosed that part of its mission was to promote the teaching of evolution in schools; in response an agent sent a letter demanding to know, “What gives you the standing or the prerogative to deem certain version[s] of the origin of life on Earth as pseudo-scientific? Why are you opposed to permitting the granting of equal time in school curricula to the teaching of the theory of creationism?” Burnham goes on to suggest that, under Reagan’s watch, the IRS turned a blind eye to the pro-life political activities of the Catholic Church, and thereby “provided the church with a substantial illegal subsidy for its political campaigns.” All of which is to say: Just because conservatives are paranoid, doesn’t mean that the IRS has never been out to get them (or progressives, for that matter). The right’s illegitimate concerns about the IRS The agency enforces tax laws that conservatives philosophically oppose The conservative movement does not actually have a principled opposition to funding law-enforcement agencies that have ever suppressed dissent. The IRS’s record is not devoid of corruption. But it’s considerably cleaner than the FBI’s, or those of most of America’s major police departments. The right’s fixation on IRS malfeasance reflects its opposition to the agency’s core mission. For the bulk of its existence, the conservative movement’s leadership has disdained income taxation in general, and progressive taxation in particular. This antipathy is implicit in the modern GOP’s unwavering commitment to lowering federal taxes on the wealthy, irrespective of the nation’s contemporary tax rates, budget deficit, or national spending. And it is explicit in the advocacy of influential right-wing activists, such as Americans for Tax Reform founder Grover Norquist and Hillsdale College president Larry Arnn, who have called for repealing the 16th Amendment and making federal income taxes unconstitutional. If one regards progressive taxation as a form of theft, then the IRS is an inherently corrupt institution. And Republicans have treated it as such. Upon taking the House in 2011, Republicans set about slashing the IRS’s budget, which fell from $14 billion that year to $11.5 billion in 2020. As a result, the agency’s number of staffers declined by 22 percent, while its enforcement division cut its payroll by 30 percent — even as the number of individual tax returns in the U.S. grew by more than 7 percent. All of which redounded to the benefit of the one percent. Between 2010 and 2018, the audit rate on returns with more than $1 million in income dropped by 63 percent. In the former year, nearly all corporations worth over $20 billion were subject to audits; in the latter year, only half were. White-collar crime went rampant. The tax gap — the difference between what Americans owe to the federal government and what they pay — swelled to an estimated $441 billion in 2013, and $584 billion in 2019. The current IRS commissioner, Chuck Rettig, believes that these were underestimates, and that the current tax gap is closer to $1 trillion. It’s worth noting that no great scandal initiated the GOP’s defunding of the tax police. Rather, House Republicans pursued downsizing the IRS as an end in itself. They saw that their budget cuts were increasing the deficit by reducing tax collections, and then pushed for yet more budget cuts anyway. The IRS has been plagued by (phony) scandals Today, Republicans portray their hostility toward the IRS as a product of the agency’s scandals. But in recent history, the agency’s scandals have largely been products of the GOP’s hostility toward the IRS. This was true of the IRS controversy orchestrated by Republican senator William Roth in 1998. What came to be known as the “Roth Hearings” purported to expose endemic abuses of power at the IRS — and endeavored to do so with cinematic flair. As the liberal commentator Kevin Drum recounts: The hearings were deliberately dramatic: Roth held them in a committee room designed to block electronic eavesdropping and had guards search everyone before they entered the chamber. IRS employees called as witnesses were blocked by black curtains and had their voices electronically altered, like mobsters afraid of being murdered in their sleep. The testimony was equally dramatic: IRS agents, they said, routinely made false accusations against people, busted into people’s homes and waved guns in their faces, and once even forced a girl caught in a raid to change her clothes while agents watched. The hearings ultimately failed to substantiate any of these specific claims, and a subsequent investigation produced no evidence of systematic abuses. But that was scarcely the point. As David K. Johnston contemporaneously reported for the New York Times: [T]he hearings were just another step in a much larger strategy by Republicans in Congress who have vowed to replace the income-tax system with a new tax code. The Republicans want nothing less than ”to pull the current income-tax code out by its roots and throw it away so it can never grow back,” Representative Bill Archer of Texas regularly tells audiences. Mr. Archer is the chairman of the Ways and Means Committee, where tax bills originate. In March, Senator Tim Hutchinson, Republican of Arkansas, introduced a bill, which quickly found many co-sponsors, that would repeal the Internal Revenue Code beginning in 2002. In the end, William Roth’s theatrical production succeeded in building momentum for legislation that cut the IRS’s budget and restricted its capacity to target high earners. Conservatives produced the defining IRS pseudo-scandal of our era — the Obama administration’s IRS targeting controversy — through both direct and indirect means. They did so indirectly (and unwittingly) by simultaneously gutting U.S. campaign-finance law and the IRS’s budget. The conservative Supreme Court majority’s ruling in Citizens United v. Federal Election Commission sanctioned nearly unlimited political spending by nonprofit groups. As a result, interest in forming tax-exempt social-welfare organizations — that could blanket the airwaves in tacit election propaganda (so long as they didn’t use tax-deductible donations to finance their political campaigns, and “primarily” focused on civic betterment) — skyrocketed. Between 2010 and 2012, the number of annual applications the IRS received from aspiring 501(c)(4) groups more than doubled. Over the same period, as we’ve seen, the IRS’s budget was cut. Tasked with assessing the legitimacy of all these groups’ operations, on a shoestring budget, the IRS resorted to a kind of profiling: The agency established a “Be On the Look Out” (or “BOLO”) list of names that would earn a prospective organization closer scrutiny. Among these were words heavily associated with conservative political groups (which had already earned a reputation for flouting federal law) such as “9/12,” “Tea Party,” and “Patriots.” But the BOLO list also included words associated with left-wing political groups, including “progressive,” “occupy,” “medical marijuana,” and “occupied territory advocacy.” Groups with these words in their names were often subjected to an exhaustingly thorough and/or maddeningly slow review process. While awaiting IRS approval, such groups were free to engage in election activity. But they had to do so under the shadow of legal ambiguity. When conservative organizations found themselves subjected to thorough scrutiny — or else, forced to wait weeks for the agency to process their applications — they often concluded that Barack Obama had personally ordered the IRS to violate their First Amendment rights. The congressional GOP ordered the Treasury Department’s inspector general to audit the IRS’s screening of conservative political nonprofits. This yielded an IG report that criticized the IRS for applying closer scrutiny to political groups on the basis of “their names or policy positions instead of indications of potential political campaign intervention.” As noted above, the IRS’s reliance on the inappropriate criteria of “names” was partially a product of its limited resources and multiplying oversight responsibilities. Given this reality, one logical interpretation of the IG’s findings would have been that the IRS needed a larger budget. But Republicans drew a less logical conclusion — namely, that the IRS had singled out conservatives for special scrutiny. The IG report could not substantiate this claim, since it did not look into the agency’s treatment of other ideological factions. But the Obama administration and mainstream press affirmed the right’s allegation, anyway. The president himself condemned the ostensible, disproportionate scrutiny of conservative groups, top IRS officials resigned amid a blitz of bad headlines. These gestures of guilt lodged the IRS targeting scandal so firmly in the right’s canonical account of Obama-era tyranny, it has remained there — even as its foundational premises have been eviscerated. In 2017, a second Treasury Department IG report found that the IRS had routinely used keyword targeting against both liberal and conservative organizations between 2004 and 2013. This finding established that (1) conservative groups had not been singled out in the years immediately following Citizens United, and (2) IRS keyword targeting was not an Obama-era innovation, let alone one cooked up by a Democratic administration hellbent on persecuting its adversaries. It is true that the IRS subjected a larger number of right-wing groups to scrutiny than it did liberal or centrist ones. But that only constitutes evidence of bias if the rate of illegal activity among nonprofits of all ideological factions were uniform. And there’s no reason to believe that this was the case. All of the 501(c)(4) applications that were set aside for scrutiny indicated — or openly declared — plans for engaging in illegal political activity. And, according to the analysis of David K. Johnston, conservative nonprofits happened to declare such intentions more often than liberal ones. Nevertheless, this week, a Wall Street Journal op-ed cited the IRS targeting scandal as a reason for Republicans to defund “Joe Biden’s IRS,” describing the nonevent as a “sobering lesson in how one of Washington’s most powerful agencies can be weaponized against political opponents.” The infrastructure deal’s odds of surviving the GOP-IRS conflict Whatever one makes of the IRS’s real and imagined scandals, they don’t add up to much of a case for serially underfunding tax enforcement in the United States. But the specter of crypto-communist taxmen coming for every faithful Christian (and/or Mammonite) in the country still haunts the GOP base. And that makes voting to increase the IRS’s budget by $40 billion a dicey proposition for Republican senators.

Other features of the tax code can indirectly impact administrative costs. For example, higher tax rates and overall tax burdens can indirectly increase administrative costs. Larger tax liabilities and higher tax rates create more incentives for taxpayers to evade paying tax and require the government to allocate resources to reducing tax evasion.15

See FN15. Smulders et al., “The Case of Carbon Taxation.”; Gale et al., “Administrative Issues in Tax Reform.”

Auditing taxpayers with accounts in tax havens is hard. Revenue agents have to investigate the scope of any cheating and figure out whether it was intentional. Tracking down the necessary documents from foreign countries can add frustrating delays. The average time to complete an offshore audit, Reicks remembered, was close to three years. Part of her task was to make sure that managers and revenue agents, who feel pressure to show productivity, did not cut these audits short. Some of the cases involved huge amounts of money. But IRS employees aren’t supposed to think about that. Since the IRS-reform bill in 1998, the agency is prohibited from evaluating agents based on how much money they bring in. Instead, they are evaluated on how efficiently they open and close audits. “You have to account for your time,” Reicks said, “and if you’re not churning out the exams, you have to explain why you’re not.” The budget cuts meant agents had to trudge through these jungles without a map. Not only were there fewer agents every year to do these audits, but many of the ones who remained were less experienced. Training and travel budgets had been slashed along with everything else. The agents conducting these audits were scattered across the country, as was Reicks’ team of 11 experts, who were supposed to guide them. In-person training became a rare luxury. Instead, most instruction was done online: PowerPoint slides appeared on a screen while someone talked. “But this stuff is so complicated that without somebody sitting in front of you, you don’t know if they’re getting what you’re saying,” Reicks said. The entire IRS has seen a similar shift. As a result, training has become less effective, IRS employees told ProPublica, and the thoroughness of audits has diminished. It’s also made the IRS a worse place to work. “The last time I was aware of hiring,” said Marie Allen, who retired in 2016 after a 32-year career at the IRS that included time auditing wealthy taxpayers, “I saw the young, angel, baby-faced agents coming in. They were told to sit down in a cubicle, given a computer and told, ‘This is your training.’” A couple of trainees decided to quit rather than suffer through weeks more of this, she said. “So we lost young talent by basically boring them to death.” Even established employees can feel themselves falling behind, making it harder to match up against sophisticated opponents. “We’re staying stagnant in what we know,” said an IRS employee who works on audits of corporations. Add to that the pressure to close audits as quickly as possible, and auditors often feel like they are rushing past signs of suspicious activity. “All I have time for is low-hanging fruit, basically,” the employee said. “It’s not only not fair to American taxpayers, it’s not very satisfying for me, either.”

DAVIES: You said the IRS is afraid of the ultrawealthy I mean, I guess that's a euphemism for saying their experience is when the ultrawealthy get all of their tax lawyers and accountants in the game, the IRS loses? EISINGER: The IRS is utterly overmatched and under-resourced when it comes to going after the superrich for their tax avoidance strategies. The superrich have huge battalions of lawyers and accountants to envelop their affairs in ways that look legitimate and complicated and hard to parse and get to the bottom of. One of the things that the ultrawealthy do is they have corporations that own partnerships that own partnerships that own partnerships that finally trickle down to provide income for the individual. And to get through those Russian-doll structures and open it up and open it up to figure out who actually owns it and who's making the money and who's losing the money and whether that's legitimate would take years and many, many people. And the IRS just doesn't have the resources. And when they try to do it, they confront these battalions of lawyers and accountants and get overwhelmed. And so it becomes very difficult. And what the result is, is that they don't do that as often. They're scared.

Dalrymple didn’t comment on any specific budget cut that’s been reported — The New York times said by 14 percent — but no matter the amount, a cut of any kind “would be devastating.” “We’ve sustained the largest percentage of budget cuts of any federal agency since 2010 to present, so literally any budget cut for us would be devastating, and it would affect service for taxpayers. It would absolutely affect all the compliance work we do; audits, collections work we do, etc., would all be impacted by that. We are not at a point where there is any fat left to cut at the IRS, in my view,” he said.

The cuts also forced discipline, Republicans argued. “We deliberately lowered the IRS funding to a level that would make the IRS think twice about what you are doing and why you are doing it,” Crenshaw told Koskinen in a hearing, “because you don’t have a single dime to spare on anything frivolous or foolhardy or even mediocre.” Neither Crenshaw nor any other current or former Republican member of Congress agreed to speak with ProPublica about the IRS. Some staffers talked on the condition of anonymity because they were not authorized to speak to the press on the record and acknowledged that the budget cuts were a mistake. Asked about the cuts, a Hill Republican staffer said, “It was punishment,” adding that the IRS clearly “needs more money and needs more people.” The lowest point for Koskinen — and for the IRS — came when, a few weeks before Christmas in 2014, after four years of consistent cuts, Congress slashed an additional $350 million from the agency’s budget. Because the cut came three months into the fiscal year, and only a few months before filing season began, it sent the agency scrambling. Desperate, Koskinen even considered briefly shutting down the IRS. Koskinen’s deputy said that this was the only time he saw his boss angry. “That night, I had trouble getting to sleep,” Koskinen said. “Normally I go to sleep in about 22 seconds. It drives my wife crazy.” The sudden cut meant that the IRS couldn’t hire enough seasonal employees to answer taxpayer questions. As a result, almost two-thirds of the tens of millions of taxpayer calls would go unanswered that year. Koskinen was outspoken about the cause of the poor service. He liked to counter the constant urging to do “more with less” with a dose of realism. In fact, he said, the IRS would do “less with less”: answer fewer calls and do fewer audits.

It took Democrats more than a decade to pass a big climate law, but the hard work has only just begun. Two months after President Joe Biden signed into law the historic Inflation Reduction Act, his administration has begun the uphill task of pumping the law’s hundreds of billions of dollars into the economy. That will mean hiring thousands of new federal workers — a challenge for agencies already depleted from the Trump years, when climate-related agencies such as EPA lost thousands of employees. EPA will also have to staff up an entirely new program: a $27 million national green bank created by the new law. Then there are the thousands of new IRS agents, tax attorneys, policy wonks and other energy experts needed to distribute tax credits and launch new programs. That’s a tall order for the government, which doesn’t hire as fast or pay as well as the private sector. After all, the private sector will need more workers, too. Jules Kortenhorst, CEO of independent clean energy firm RMI, estimated that the U.S. will need twice as many electricians. Worldwide, the demand could swell to four to five times the industry’s current size. “There is going to be such a desperate shortage of electricians,” he said. Also in demand, he said, will be project developers, investors, advocates and journalists. As agencies staff up, federal regulators still must write the rules overseeing the law’s energy tax benefits. The Treasury Department recently asked the public to weigh in on renewable energy tax incentives, writes POLITICO’s E&E News reporter Robin Bravender. “There is just so much to write and so much to implement,” said David Burton, a partner at Norton Rose Fulbright. “I think it’s going to be a heavy lift for them.”

Upgrades to the agency’s systems could allow taxpayers to receive callbacks instead of holding through the agency’s notoriously long waiting times. Required in-person visits by identity theft victims would be eliminated in favor of web solutions. Taxpayers would have online accounts, like they do at banks. Updated data analytics would target tax cheats and help the agency’s shrunken enforcement staff be more efficient. Getting from here to there will be a heavy lift. A recent report from the National Taxpayer Advocate, an independent office within the IRS, described the agency’s collection of $3.5 trillion in taxes last year as perhaps the most critical job in government. But, as advocate Nina Olson wrote, the IRS is accomplishing this task with core computer systems that “are among the oldest in government.” The need to modernize the agency “will forever remain a top priority” as the IRS is charged with safeguarding a “vast amount of sensitive financial and personal data,” Rettig said in testimony before Congress last week.

Last August, in a separate part of the IRA, Congress provided massive long-term funding for the agency: nearly $80 billion over the next decade to supplement existing appropriations. Aside from operational and enforcement capabilities, a significant chunk of those funds will go toward hiring approximately 87,000 additional employees.

Technological advancements. According to Kovacev, the new enforcement funds won’t only be used to bring on more employees. There will also be investments toward “sophisticated data analytics and artificial intelligence tools, which in the long run will probably be much more profitable than just adding a bunch of bodies.” He explained that advanced algorithms can be run by machine-learning tools that help IRS agents root out anomalies based on data patterns. This can help with discovering underreporting using data the IRS has on hand. An example would be a mismatch between aspects of a corporation’s tax return and their financial statement. “Certainly with this money, I would expect there to be an increase in that kind of technological advancement,” Kovacev said, adding that “a big chunk” of the appropriation will be deployed for current compliance enforcement in areas such as conservation easements, microcaptive insurance companies, and virtual currency. Recently published research presented at a June webinar co-hosted by the IRS and the Urban-Brookings Tax Policy Center suggests that artificial intelligence can better predict where to recoup owed taxes. A study released in April by a group of Stanford University and IRS researchers presented a possible opportunity for using machine learning to “optimize” audit selection. The IRS already uses a random selection model to choose which returns are audited based on noncompliance risk factors. The systems are automated and rely on filters to flag returns with an increased likeliness for error. Improved tools developed because of the reconciliation bill could perhaps refine this process. Beyond enforcement, the additional funds are expected to upgrade the IRS’ computer systems, further advance customer service software, and improve the overall taxpayer experience.

The debt ceiling deal’s funding reduction for the IRS in the short term is not as serious a concern for the agency’s advocates as the political target that the deal places upon the IRA funding in the future. “It’s certainly a signal that the funding was fragile to begin with. There were no guardrails here – there was always going to be the opportunity for Congress to short the IRS on annual appropriations,” Holtzblatt said.

It’s not clear exactly how the funding losses could impact IRS plans, although the result may depend on whether annual appropriations cuts further squeeze the agency. Democrats have so far projected confidence that the IRS can still carry out plans to build up customer service, hire more auditors to enforce the tax code and update technology in the near term. IRS Commissioner Danny Werfel has said that even with the $80 billion cash infusion in place, the yearly government funding process could determine the agency’s course in the years to come. If its regular annual budget falls below the fiscal 2022 level plus inflation, the IRS will have to siphon funds from its $80 billion stash to maintain its typical operations, he wrote in an April memo included in the IRS’ strategic operating plan. Doggett said he believes Democrats can stave off deeper budget cuts that impact the IRS’ immediate plans to expand tax enforcement but the partisan divide on the issue will continue to linger over funding debates. “I’m satisfied that we can win the short-term battle, maybe not in the House but ultimately in conference committee, and IRS can do this [work] initially,” he said. “Over the long term, there’ll be a struggle about it.”

What policymakers give, policymakers can take away. Nine months after Congress enacted President Biden’s proposal to boost the Internal Revenue Service’s 10-year budget by $80 billion, the president and House Speaker Kevin McCarthy (R-CA) have agreed to cut the IRS’s budget by up to $21.4 billion over the next three years as part of a deal to raise the debt ceiling. The bipartisan agreement’s cutbacks just nine months after the enactment of the Inflation Reduction Act (IRA) point to the fragility of the IRS budget. A reduction of this magnitude may not only have direct impacts on IRS operations, but it could also have negative indirect effects on how the agency spends the remaining IRA funds. What does the agreement say? Some of the agreement is clear as to the negotiators’ intent toward the IRS, but other parts are ambiguous. Start with the bill language. Nearly $1.4 billion would be taken back immediately from unobligated funds provided by IRA. But monies for taxpayer services and modernization would not be cut. That’s not too surprising. Ensuring the phones are answered and refunds are paid quickly are priorities for voters and the people who represent them. Moreover, Congress already zeroed out funding for business systems modernization in the fiscal year (FY) 2023 appropriations, arguing that the agency could rely on leftover funds from COVID relief legislation, as well as the IRA funds. Additional cutbacks would slow progress in technological improvements at the agency. However, the bill leaves it to the discretion of the Biden administration as to where the $1.4 billion of cuts would occur, with the choices being the other IRS accounts (tax enforcement, operations support, and the 2024 pilot for direct e-filing), several Treasury offices, or the US Tax Court. The Congressional Budget Office (CBO) estimates that the $1.4 billion reduction will result in a reduction in federal revenues, leading to a net increase in the deficit of $900 million over the next ten years. For FY2024 and FY2025, the fate of the IRS effectively hinges on a handshake between Biden and McCarthy. Nothing is specified in the actual bill. According to a White House briefing and press reports, the agreement would “repurpose” $10 billion in the FY2024 appropriations process and reallocate another $10 billion in FY2025 to other non-defense priorities. Why the distinction between 2024 and 2025? Here’s one (hopeful?) theory. In its recent strategic operating plan, the IRS warns that IRA’s $3.2 billion allocation for taxpayer services would be exhausted in four years if the regular annual appropriations were frozen. Does “repurposing” the 2024 funding open the door to shifting some of the $46 billion in IRA for enforcement to taxpayer services? Whatever the reasons, there is one strong advantage to the vague language in the agreement for the negotiators. It complicates the ability of CBO to precisely estimate the offsetting revenue loss due to the hefty reduction in the IRS’s funding in 2024 and 2025. However, at the request of Senate Budget Committee Chairman Sheldon Whitehouse (D-RI), CBO projected that clawing back $21.4 billion in IRS funding would lead to a revenue loss of $40.4 billion, for a net deficit increase of $19 billion. What are the worst-case scenarios? Since IRA’s funding covered an entire decade, one possibility is that the IRS would accelerate spending—either hoping Congress would restore funding after 2025 or fearing Congress would cut more after 2025. But unless the IRS rushes out to buy lots of laptops and pens, there is a limit to how much faster the agency can spend. Accelerating spending could also undermine the goals of IRS strategic operating plan. It takes time to recruit and hire the accountants and lawyers with the skills and experience to tackle the complicated tax returns of the wealthy and big businesses. And even if masses of mid-career tax professionals were rushing to apply for jobs at the IRS, there are limits to how fast the agency could absorb thousands of new hires. Moreover, the strategic operating plan lays out a careful, incremental strategy for investing in technology. Former Commissioner Charles Rossotti warns the IRS should not race to hire lots of enforcement agents until it figures out how to use data and technology to improve audit selection. On the flip side, some may view the cuts as a signal that neither Congress nor the Administration is fully committed to the IRA funding. If those at IRS charged with implementing IRA lose confidence in the willingness of lawmakers to sustain funding increases, they may be reluctant to commit to years-long investments in staff and technology. What is the best-case scenario? At least for the time being, the IRS still retains most of the IRA funding boost. Rather than accelerating spending or slowing investments, the IRS could stay the course and cautiously test out approaches that could improve the efficiency and fairness of tax administration and then provide Congress with the evidence to evaluate the agency’s spending needs. If Congress were to act on that evidence, the Biden-McCarthy deal could yield a good outcome for the IRS and the vast majority of taxpayers.

Kevin McCarthy trumpeted a debt-ceiling deal Sunday, but increasing debt another $4 trillion with minimal concessions is nothing to boast about. To be fair, the House speaker has a razor slim majority and Republicans don’t control the Senate, where Minority Leader Mitch McConnell and his sidekick Lindsey Graham have announced that the only thing they care about is Ukraine. But McCarthy’s one dealbreaker should have been his promise to defund President Biden’s massive $80 billion to turbocharge an already weaponized IRS. This was the totemic centerpiece of his pitch to become speaker. It was the most memorable promise of the Republicans’ midterm campaign to win back the House. It struck a chord with voters, wary of funding a new “army” of armed IRS agents to harass middle-class families and small business owners and abuse their powers to target political dissidents, Soviet-style. “Our very first bill will repeal the funding for 87,000 new IRS agents,” McCarthy vowed. “You see, we believe government should be to help you, not go after you.” Sure enough, the House voted 221-210 to repeal the extra IRS funding. “Promises made,” the newly minted speaker said Jan. 9, banging the gavel on the first bill of the Republican-controlled House. What about promises kept? In the debt-ceiling deal outlined Sunday and due to be inked later this week, McCarthy has allowed the lion’s share of that extra IRS funding to remain unmolested: preserving $78.1 billion of the $80 billion. As rebel GOP Rep Dan Bishop put it: “So there will be 85,260 more IRS agents rather than 87,000 to eat you alive. Big win.”

Democrats expended a lot of political capital to get the IRS more money last year. They faced an onslaught of campaign ads, many of them misleading, about the expected hiring of 87,000 “new agents” to target low- and middle-class Americans. Now, Biden administration officials are offering assurances that the spending cuts secured by Republican negotiators will have minimal impact on the agency’s operations over the next few years. The agency is on course to still get nearly three-quarters of the $80 billion boost that Congress approved for it last year. And the agency has the flexibility to spend some of that money sooner than planned, officials stressed. “The IRS has the resources it needs in the near term to improve customer service and go after wealthy and corporate tax evaders,” Deputy Treasury Secretary Wally Adeyemo tweeted.