IRS tapped Inflation Reduction Act funds to cover 2025 filing season, watchdog says

The IRS dipped into its supplemental funding from the Inflation Reduction Act of 2022, P.L. 117-169, to “deliver a successful filing season” in fiscal year 2025 because its annual appropriation was not enough, an IRS watchdog’s report said.

Money from the legislation was intended to supplement the IRS’s annual appropriation, which was about $12.3 billion for fiscal year 2025, the report from the Treasury Inspector General for Tax Administration (TIGTA) said.

But agency officials said they spent about $4.8 billion in Inflation Reduction Act funds “to deliver a successful filing season and comply with tax laws,” TIGTA said. The IRS used $3.5 billion for labor costs and $1.3 billion for information technology operating and maintenance costs, TIGTA said.

Of the $12.3 billion annual appropriation, $5.4 billion was budgeted for enforcement, $4.1 billion for operations support, and $2.8 billion for taxpayer services, the report said. The appropriation did not include money for business systems modernization.

Inflation Reduction Act background

The IRS had spent $15.7 billion, or 61%, of its $26 billion in Inflation Reduction Act funds as of Sept. 30, 2025, with employee compensation ($7.3 billion) leading the expenditures, TIGTA said.

IRS staff compensation was the highest expense category despite a loss of 25,386 employees, or about 25% of the workforce. Staff cuts did not significantly affect employee compensation in fiscal year 2025, when workers who left the IRS continued to be paid through offers such as the deferred resignation program, which the IRS approved for 21,646 employees, the report said.

The IRS spent $6.7 billion in Inflation Reduction Act money in fiscal year 2025, the report said.

The Inflation Reduction Act originally budgeted $79.4 billion in supplemental money to be spent over 10 years. By January of this year, Congress had reduced that amount to $26 billion. The $53.5 billion in rescissions resulted in $41.8 billion taken from enforcement funding and $11.7 billion from operations support, TIGTA said.

Contractors

The IRS spent $5.2 billion of Inflation Reduction Act funding on contractor support during fiscal year 2025, while canceling 146 contracts related to the legislation that originally totaled about $776 million of obligated funds, the report said. The IRS reduced the obligations for those contracts by $70 million, designated $195 million of potential funding reductions for the contracts, and spent $542 million before the contracts were canceled or revised.

The contracts included support for the Office of Digital Assets Initiative, business accounts, the Integrated Data Retrieval System, the enterprise data platform migration, cybersecurity architecture, enterprise case management, and data-at-rest encryption.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.