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Nondefense squeeze won’t spare IRS in omnibus spending talks

Agency will get a 'healthy increase' but not enough to fix long-term woes, Van Hollen says

Sen. Chris Van Hollen, D-Md., said the IRS budget is the “number one priority" of his appropriations subcommittee.
Sen. Chris Van Hollen, D-Md., said the IRS budget is the “number one priority" of his appropriations subcommittee. (Caroline Brehman/CQ Roll Call file photo)

The IRS won’t get the appropriations boost for the ongoing fiscal year that Democrats had hoped for, adding emphasis to the party’s push to offer the agency $80 billion in extra funds through their stalled budget reconciliation package.

Sen. Chris Van Hollen, the Maryland Democrat who chairs the appropriations subcommittee overseeing the IRS budget, said the agency will get a “healthy increase” in the delayed fiscal 2022 spending package lawmakers are aiming to finalize by March 11. But he said it’s less than Democrats proposed in the fall and won’t be enough to fix the Internal Revenue Service’s long-term woes.

“We’re not going to be able to do what we want to do,” Van Hollen said. “We’re gonna prioritize funding for the IRS because they need the money badly to improve their systems, provide customer service. As you know, they have a backlog at the IRS when it comes to refunds.”

In October, Senate Democrats proposed almost $29.4 billion in discretionary spending in their fiscal 2022 Financial Services appropriations bill. That would be a nearly $4.8 billion boost, or more than 19 percent over fiscal 2021. The measure included $13.6 billion for the IRS, which would give the agency a nearly 14 percent year-over-year increase — a rise in line with President Joe Biden’s budget request.

Those plans are being squeezed as Democrats hammer out a deal with Republicans that can get them the votes they need to move an omnibus appropriations package through the evenly divided Senate.

Van Hollen attributed the smaller budget increase for the IRS to a significantly lower rise for the Financial Services subcommittee allocation compared to Democrats’ fall proposal. The Financial Services panel oversees funding for the federal judiciary, Treasury Department, District of Columbia and dozens of other federal offices and agencies.

Top appropriators reached a “framework” agreement last week but have offered little clarity on what that entails, and they’re still negotiating details. The GOP has sought a level of parity between defense and nondefense spending, a point that the top Republican on the Senate Appropriations panel, Richard C. Shelby of Alabama, reiterated on Thursday.

That means Democrats will likely need to pare back what they proposed in the fall, which would’ve provided a significantly bigger boost to nondefense spending. “Look, unfortunately as you know, this whole category got cut” from the initial spending bills, Van Hollen said. “So we’re not going to be able to do what we want to do.”

Van Hollen said that while the IRS won’t see as big of a funding increase as initially proposed, its boost will be higher than other agencies under the subcommittee’s purview. He described the IRS budget as the panel’s “number one priority.”

He said the shift means Democrats must move forward with a plan to provide $80 billion in extra funding to the IRS outside the annual appropriations process. That funding is part of a $2.2 trillion climate and social safety net package currently on ice because of disagreement on spending.

The funding is largely focused on enforcement, so it would help pay for the package by bringing in tax dollars owed that would’ve otherwise gone uncollected.

“This is going to be an improvement over where they are now, but it will not be enough to tackle the long-term issues and we’ve got to come back and finish the job,” Van Hollen said.

The party seems to agree on money for the IRS, which would also include extra for other IRS departments including taxpayer services and systems modernization.

But if they can’t agree on the broader reconciliation package — which avoids a GOP filibuster and needs only Democrats’ votes to pass — they’ll likely run into too much Republican opposition to give the IRS budget a major boost.

Not a ‘panacea’

That divide was on display Thursday when the Senate Finance Committee convened a hearing on the ongoing tax season.

“I for one am skeptical that technology and money, which seem to be the answer to a lot of our problems these days, is going to be the panacea that’s gonna solve the problem,” Sen. John Cornyn, R-Texas, said. “Maybe that’s part of the answer.”

A backlog of millions of unprocessed tax returns and correspondence is plaguing the agency amid the 2022 tax season, and the IRS itself has warned of frustrating weeks ahead for taxpayers seeking refunds.

Finance Chair Ron Wyden, D-Ore., blamed the problems on Republicans, saying they’ve failed to support funding the agency needs.

The panel’s ranking Republican, Michael D. Crapo of Idaho, responded that Democrats are trying to explain the current crisis by blaming the GOP and to justify their $80 billion spending proposal.

Crapo said the IRS budget has kept up with inflation, though Democrats argue it’s failed to keep pace with the climbing volume of tax returns the agency must process.

Still, there might be some window for bipartisan compromise. Lawmakers from both sides of the aisle expressed frustration with the IRS’ need to manually process paper returns, a major cause of the current backlog.

While Democrats urged more funding to hire staff too, senators from both parties suggested modernizing IRS systems to improve technology.

Crapo confirmed with National Taxpayer Advocate Erin M. Collins that better technology would provide cost savings over time because the agency is currently spending to patch up outdated systems and process paper. Collins emphasized the need for stable, multiyear funding to fix the IRS’ problems and invest properly in new systems.

“What we need is assistance from the IRS,” Crapo said. “And I think that we can find some common ground there if we can work in that context.”

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