IRS spending shifts under the Inflation Reduction Act

The Treasury Inspector General for Tax Administration (TIGTA) recently released a snapshot report on how the IRS used its Inflation Reduction Act (IRA) funding through Sept. 30, 2025.

For tax professionals, this report goes beyond numbers. It highlights where the IRS is focusing its efforts and what changes may affect client service in tax year 2026.

How much funding remains?

The IRS originally received $79.4 billion under the IRA. That amount has been reduced multiple times. As of March 2026, about $26 billion remains available through 2031. This reduction matters. When funding shrinks, priorities shift. The IRS must focus on core operations, which directly affects enforcement, service and modernization efforts.

Where is the money going?

As of Sept. 30, 2025, the IRS has spent about $15.7 billion, or 61% of current funding. The largest spending categories by object class were:

• Employee compensation: $7.3 billion
• Contractor and advisory services: $5.2 billion

In plain terms, most of the money is going towards staffing and outside support. That includes approximately $4.8 billion the IRS used in FY 2025 to supplement regular appropriations, including $3.5 billion for labor costs and $1.3 billion for IT operating and maintenance costs. In other words, some IRA funding is supporting core operations, not just long-term modernization.

The report also shows spending allocated across key areas such as operations support, enforcement, taxpayer services and business systems modernization. These align with the IRS’s long-standing goals: improve service, modernize systems and strengthen compliance.

Fewer employees, but costs remain high

The IRS reduced its workforce by about 25% in early 2025. However, compensation costs did not drop right away. Many employees accepted incentives to leave but stayed on payroll through Sept. 30, 2025. For tax professionals, this creates a transition period. Staffing levels may look stable, but operational changes could still affect processing times and IRS responsiveness.

Continued investment in technology

The IRS spent $5.2 billion on contractor support, much of it tied to IT and modernization projects. At the same time, the agency canceled 146 contracts totaling about $776 million. 

This signals that while modernization remains a priority, the IRS is adjusting its approach. Projects are being refined, scaled back or redirected.

Enforcement remains important but measured 

Funding cuts are expected to reduce enforcement activity compared to original projections. However, enforcement funding remains a priority area. This means audits and compliance efforts will continue, especially for complex returns, but may not expand as aggressively as once expected. 

Modernization will continue

Technology investments are ongoing. Expect updates to IRS systems, digital tools and data processes. These changes may improve efficiency over time but could bring short-term learning curves. The IRS used IRA funds to support filing season operations and IT needs when regular funding fell short. This suggests progress, but not consistency across all areas. 

2026 is a transition year

Between workforce reductions, contract changes and funding cuts, the IRS is still adjusting. Some improvements will be visible, while others may take time.

Why this matters

This report provides a practical view of how the IRS is using its resources. The agency is investing in people, systems and enforcement, but within tighter limits than originally planned.

For tax professionals, understanding these shifts helps set client expectations and prepare for changes in IRS operations. The bottom line: the IRS is evolving, but not all changes will happen at once. Tax year 2026 will reflect that transition.