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Treasury Report Shows High Return on Investment of Inflation Reduction Act

S.J. Steinhardt
Published Date:
Feb 7, 2024

The $80 billion allocated to the IRS by the Inflation Reduction Act (IRA), if fully appropriated, would yield a significant return on investment, allowing the agency to recover nearly $561 billion in overdue and unpaid taxes over the next 10 years, higher than earlier estimates, a Treasury Department analysis showed.

The Washington Post reported that this investment in the IRS could add up to at least five to seven dollars in additional tax collected for every dollar spent. 

If Inflation Reduction Act funding were to be renewed when it runs out, as the Biden Administration has proposed, estimated revenues would be as much as $851 billion, the paper said.

“The IRS’s previous estimates of revenue generated by IRA funding were limited to revenues directly resulting from increased enforcement staffing. Consequently, the estimates did not present a complete picture of the revenue benefits of the innovative investments we are making under the IRA SOP [Strategic Operating Plan,]” the Treasuryreport concluded. “The approach ignored many activities that will influence revenue, including enhancing services to improve voluntary compliance, modernizing technology, and adopting analytic advances that can dramati­cally improve productivity. It also ignored the deterrence effect of compliance activities on taxpayers’ behavior. To account for the potential revenue impact of the full array of investments contemplated in the IRA SOP, we need to look at the effects on revenue collection in a more comprehensive way.”

“This analysis demonstrates that President Biden’s investment in rebuilding the IRS will reduce the deficit by hundreds of billions of dollars by making the wealthy and big corporations pay the taxes they owe,” said Lael Brainard, Biden’s top economic advisor, in a statement reported by the Post. “Congressional Republicans’ efforts to cut IRS funding show that they prioritize letting the wealthiest Americans and big corporations evade their taxes over cutting the deficit.”

A Treasury Department press release states that the IRA’s investments in the IRS “were necessary because a decade of deep funding cuts resulted in unacceptable service levels, prevented technological upgrades, and undermined enforcement, particularly efforts focused on wealthy people and big corporations that do not pay what they owe.”

Yet Inflation Reduction Act funding has been under attack by congressional Republicans. As part of the 2024 budget negotiations, an agreement was reached last month to rescind $20 billion, or 25 percent, of the IRA allocation. Cutting that  $20 billion, however, could cost more than $100 billion in potential revenue, the Post reported.

The chair of the U.S. House of Representatives’ Committee on Ways and Means disputed elements of the IRS report.

“This new self-serving report calls for even more IRS funding, uses pie-in-the-sky numbers, all without being straightforward about where the burdens of massive new enforcement efforts will fall,” Rep. Jason T. Smith (R-Mo.) wrote in an email to the Post. He called the new study a “political stunt,” the Post reported.

The tax gap—the difference between taxes owed and taxes paid—grew to $688 billion in tax year 2021, the IRS reported in October.

According to the Journal of Accountancy, the IRS said last month that it has collected $520 million in taxes owed by millionaires since mid-2023, as it pursues enforcement initiatives that focus on high-income taxpayers, complex partnerships, and large corporations. Commissioner Danny Werfel credited the improvements, in part, to IRA funding that has helped to modernize the agency.

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