What Is the Impact of a Budget Sequester on the IRS?

Among the federal agencies slated to have its budget cut due the sequester is the IRS. Find out how this will affect taxpayers.

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As you doubtless know if you've been paying attention to the news, a federal budget sequester went into effect on March 1, 2013. This is due to the failure of Congress and President Obama to reach the budget cutting goals they set back in 2011 when the nation's debt ceiling was raised. $1.2 trillion was supposed to be cut over the next decade. Under the sequester, if this goal was not reached, automatic spending reductions of $1.2 trillion over the next ten years had to be made across-the-board. The reductions are allocated 50% to defense and 50% to nondefense programs.

The sequester was designed to be as disruptive and unfair as possible to give both sides a strong incentive to reach an agreement. Unfortunately, it didn't work. So, unless Congress acts, some painful cuts are going to go into effect. Most of these won't begin to be felt until April at the earliest. Among the federal agencies slated to have its budget cut is the IRS. How will this affect taxpayers?

First of all, the IRS says the sequester should not result in any delays in processing this year's tax returns or sending out tax refunds. The deadline for filing 2012 returns without an extension remains April 15.

However, the IRS faces budget cuts under the sequester totaling $597 million. If the cuts are not restored, the IRS says it will have to start unpaid employee furloughs by the summer. Additional savings will be achieved by continuing the IRS’s hiring freeze; reducing funding for grants and other expenditures; and cutting costs for travel, training, facilities, and supplies.

If this occurs, the level of all IRS services will decline. It will be harder to get the IRS on the phone, and will take longer to get responses to taxpayer letters. The IRS would also be forced to audit fewer tax returns. Right now you may be saying "boo hoo." But fewer audits could result in billions of dollars in lost revenue and further complicate deficit-reduction efforts. In recent years each dollar spent on the IRS has returned at least $4 in additional enforcement revenue.

Fortunately, it may not come to this. The House and Senate are trying to pass a new budget bill that would set federal spending at fiscal year 2012 levels for the Treasury Department, IRS, and other government agencies through September, while fully funding the Department of Defense for a year. Given the partisan gridlock in Washington, however, it is unclear whether they can succeed.

March 2013

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