IRS Funding on Tap as Congress Returns From Summer Recess

Congress returns from its August recess Tuesday with little time to fund the embattled IRS before the looming threat of a federal government shutdown.

Lawmakers must agree on government-wide funding by Sept. 30 or risk a funding lapse. The tax collection agency tasked with implementing breaks created by President Donald Trump’s new signature law ranks among many contentious items on their plate.

House Republicans are seeking to cut billions from the IRS budget, while Democrats oppose further hampering its workforce after months of leadership turmoil and layoffs.

Even a stopgap measure that leaves long-term funding decisions for later in the year would complicate preparations for the next tax filing season, said Vanessa Williamson, a senior fellow in governance studies at Brookings.

“The best-case scenario is still pretty bad,” Williamson said.

House GOP appropriators in July proposed slashing the IRS budget by $2.8 billion for the upcoming fiscal year, cutting tax compliance funding more deeply than the White House requested. The full panel is slated to send the bill to the floor Wednesday.

The bill also would block funding for the IRS to provide free, public online tax filing. Congress is awaiting a report next month, mandated by the new Trump tax law, on the feasibility of replacing the IRS-run Direct File tool with public-private partnerships, a potential boon for tax preparation companies.

Senators haven’t yet officially countered with their proposed IRS funding, though they’ve tempered House proposals in the past. The chamber’s de facto 60-vote threshold on most legislation gives Democrats leverage.

“Democrats have traditionally been been more favorable to funding for taxpayer services and for funding enforcement,” especially when it comes to audits of high-income taxpayers, the wealthy, large corporations, and complex partnerships, said Greg Leiserson, a senior fellow at the Tax Law Center at NYU Law.

The IRS’s bid to reverse recent staff buyouts has given employees hope Congress will similarly fund the agency’s staffing needs.

“We expect lawmakers who care about customer service for taxpayers, catching tax cheats, and reducing the deficit to follow suit and reverse plans to cut the IRS budget and provide the agency with the resources it needs to get the job done,” said Doreen Greenwald, national president of the National Treasury Employees Union.

IRS, Treasury Vacancies

Senators will return to the task of vetting candidates for tax policy posts after the Treasury Department lost key leaders over the break. Trump’s IRS chief Billy Long and the No. 2 at Treasury, Michael Faulkender, both unexpectedly left their posts in August.

Other key offices driving national fiscal regulation also remain vacant as the Senate limps through Trump’s nominations.

Senators held a hearing before the break for Derek Theurer’s nomination to serve as the Treasury Department’s deputy undersecretary for legislative affairs.

Donald Korb’s bid to be the IRS’s next chief counsel is also due for a hearing. Korb brings a lengthy resume of combating tax fraud in the same role during President George W. Bush’s administration. His work at Sullivan & Cromwell LLP since then has saved companies billions of dollars in potential taxes.

All of them would need to get through Sen. Chuck Grassley (R-Iowa), a senior member of the Finance Committee who has held up other Treasury nominees to protest the Trump administration’s tightening of solar and wind energy tax credits.

Next Big Bill?

The ink was barely dry on the package of tax breaks that Trump enacted in July before Republicans pondered another tax-and-spending bill as a vehicle for their partisan agenda, or at least for fixes to the last one.

Another party-line bill, though, would be a tall order for the narrow Republican majority.

Additional tax legislation would give industry groups and activists a chance to push for policy changes that fell short this summer, like increasing the deduction for passthrough entities or curbing breaks on multi-employer pension plans and municipal bonds.

The gaming industry and its Capitol Hill allies also hope to reverse a provision from the new GOP tax law that limits the ability to deduct gambling losses. That’s unlikely to pass on its own but could ride with a larger legislative package this year, according to an industry source.

The expiration of a suite of tax breaks at year’s end could prompt legislative action, too. An expansion of tax credits that help taxpayers cover premiums on health insurance purchased on Affordable Care Act marketplaces is set to end, and Democrats have called for their renewal.

Moderate Republicans and their party’s leadership may want to address the issue ahead of the midterm elections to avoid a spike in voters’ health care costs on the heels of their cuts to Medicaid in the GOP tax law.

Republican Study Committee staffers last month heard from a conservative think tank that argued the subsidies benefit insurance companies more than they help enrollees.

Other expiring tax breaks with bipartisan backing include those that benefit motorsports speedways and companies that hire employees struggling to find work. Widespread support for granting treaty-like tax benefits to companies doing business between Taiwan and the US could also see movement in Congress this year.

Larger legislative vehicles funding the government or altering fiscal policy could serve as ways to renew or even modify breaks. For example, Rep. Lloyd Smucker (R-Pa.) is pushing his legislation backed by fellow members of the tax-writing Ways and Means Committee that would boost the employment bonus, known as the Work Opportunity Tax Credit, before it sunsets.

The bill, Smucker said, “should be included as part of any tax extension vehicle considered this year.”

(An incorrect AI summary previously at the top of this story was removed.)