The IRS is facing a major funding rollback after Congress rescinded $41.8 billion of the $79.4 billion initially allocated under the Inflation Reduction Act (IRA). The cuts hit hardest in enforcement, potentially reducing federal revenue by tens of billions through 2034, according to government forecasts.
As of March 31, 2025, the IRS had spent $13.8 billion of its remaining funds. The agency must now stretch just $37.6 billion in supplemental IRA money through 2031, while still managing regular operations and modernization projects.
What got cut: Enforcement takes the biggest hit
Every dollar of the rescinded $41.8 billion came from funds originally earmarked for enforcement. This rollback has triggered concern among analysts and lawmakers alike:
- In 2022, the Congressional Budget Office (CBO) predicted IRA-funded enforcement could return $204 billion in revenue through 2031.
- A 2024 CBO revision estimated that just a $20B cut could reduce revenue by $44 billion over a decade.
- No updated estimate yet exists for the full $41.8B cut.
The enforcement rollback directly impacts staffing, audits, and legal investigations—raising alarms about the IRS’s ability to close the tax gap.
What’s left: IRS spending breakdown as of Q1 2025
Here’s where the IRS has used its IRA funding so far:
- Operations Support: $6.0B of $25.3B
- Business Systems Modernization: $2.7B of $4.8B
- Enforcement: $2.7B of $3.8B
- Taxpayer Services: $2.2B of $3.2B
- Energy Security: $63.6M of $500M
The IRS also spent $11.6 million on a Direct e-file tax return study in FY2023.
Annual funding hasn’t kept pace with inflation
The IRA funding was intended to supplement, not replace, the agency’s annual budget. But Congress has not adjusted IRS base appropriations for inflation since 2022. For FY2025, the IRS received $12.3 billion in standard funding, distributed as:
- Taxpayer Services: $2.8B
- Enforcement: $5.4B
- Operations Support: $4.1B
Although Congress allows 5% of funds to be shifted between areas (with approval), no enforcement money may be transferred in.
Employee cuts grow, but payroll costs persist
The IRS has lost 25% of its workforce so far in 2025:
- 25,386 employees have left through separation offers or other exits.
- 294 received termination notices due to Reduction in Force (RIF) actions.
- Many of the departed are still being paid through September due to departure compensation packages.
In total, $6.1 billion in IRA money has gone toward employee compensation, including pay and benefits. Nearly $2.5 billion of that was spent in the current fiscal year.
Contractor funding canceled amid digital modernization delays
The second-largest IRS expense under the IRA was contractor support, totaling $4.9 billion. This includes:
- Advisory services
- IT system upgrades
- Engineering and consulting for data infrastructure
But the cuts have taken a toll. As of April 2025, the IRS canceled 93 contracts—worth over $408 million—impacting key modernization projects like:
- Digital Assets Initiative
- Business Accounts Platform
- Cybersecurity infrastructure
- Integrated Data Retrieval System (IDRS)
Government watchdog flags risks
The Treasury Inspector General for Tax Administration (TIGTA) reviewed the IRS’s spending and staffing. Though its July 2025 report didn’t make formal recommendations, it emphasized:
- Disruption in major modernization efforts
- Ongoing employee departures tied to budget constraints
- Growing uncertainty around staffing and operational capacity
The TIGTA report, based on internal financial data and interviews, confirmed that budget issues are straining the IRS’s ability to fulfill its long-term goals.
What happens next?
While the IRS retains $37.6 billion in IRA funds through 2031, many core projects are at risk. The canceled contracts, workforce reductions, and funding freeze for enforcement are already slowing down modernization and compliance efforts.
Further cuts or stagnation in annual appropriations could jeopardize tax filing season readiness in 2026. For now, the IRS continues to pay thousands of former employees, while preparing for new challenges—amid deep uncertainty over whether enforcement efforts can recover in time.
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