No more 'fire-breathing dragons'? Joe Biden has slashed IRS funding by $21B as part of his debt limit deal — here's how the beleaguered tax agency plans to cope now

Serah Louis
·4 min read
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After months of negotiations, President Joe Biden and House Speaker Kevin McCarthy finally agreed to suspend the country’s debt limit — or the amount of money the federal government can borrow — for two years.

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The U.S. hit its $31.4 trillion ceiling back in January, triggering panic and fear over a potential default. Without a deal to raise the borrowing limit, Treasury Secretary Janet Yellen had warned the country could run out of cash and be unable to pay its bills come June 5.

But a mere two days before that deadline, Biden signed a bill to put the brakes on the debt limit until January 2025. But it comes with plenty of caveats and cuts to planned spending. Here’s what some of those changes cover — and most importantly, what's getting clawed back.

Spending cuts, the student loan freeze and more

The bipartisan bill has reduced discretionary spending for the 2024 fiscal year and caps it to 1% growth in 2025, which White House officials told reporters could “likely” save around $1 trillion over the next decade.

It has also added new work requirements for adults aged 50 to 54 who don’t have children living with them to qualify for the Supplemental Nutrition Assistance Program (SNAP). The previous law only imposed those limits on adults aged 18 to 49, although the bill exempts veterans, people without housing and young adults 24 and under who are transitioning out of the foster care system.

As for proposed clean energy projects, a lead agency is being created to oversee reviews and ensure they’re completed within one to two years.

About $30 billion in unspent funds from a previous COVID-19 relief bill was also clawed back, with some of the money diverted to non-defense discretionary spending.

The legislation also officially ends the student loan payment freeze as of the end of August — and restricted Biden’s ability to reinstate it. That means, come September, interest on student loans will begin accruing again, while loan payments will resume in October.

Read more: If you owe $25K+ in student loans, there are ways to pay them off faster

There’s a major pull-back on IRS funding

To pay for the debt deal, Biden had to go back on some of his spending plans — especially when it comes to the federal tax agency. The deal rescinded $1.38 billion and another $20 billion of IRS funding from the Inflation Reduction Act will be put toward non-defense programs.

Last year, Biden announced he’d be increasing funding to the IRS, which has been woefully underfunded and understaffed for a decade.

A cool $80 billion was set to be spread over 10 years in order to modernize the agency’s infrastructure and replace its aging workforce. And $45.6 billion from that total was allocated specifically for boosting enforcement, especially around big businesses and the wealthy tax evaders.

Former IRS Commissioner Charles Rettig estimated in 2021 that the agency loses $1 trillion in unpaid taxes each year and called for more “fire-breathing dragons” to take cheaters to task.

However, some critics raised concerns that dialing up enforcement on upstanding tax-paying Americans could breed resentment and anger. Republicans also approved legislation to pull back on the entire $80 billion.

While the agreement significantly slashes back funding, officials told reporters in a background call at the time it was announced that they expect no disruptions in the short term, according to The New York Times.

In fact, on August 2, IRS Commissioner Daniel Werfel and Treasury Secretary Janet Yellen announced that the tax agency is moving ahead on plans to become paperless. The IRS will allow taxpayers to file every major tax form online and will digitize its entire paper catalogue by 2025, which it predicts will signficantly increase its customer service capabilities and manage to turn around refunds by up to four weeks sooner.

And if worse comes to worse, officials also indicated to the New York Times at the time of the announcement that the IRS could potentially use some of the money that had been reserved for later years, and return to Congress at a later date to request more funding.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.