By Richard Cowan, Andy Sullivan and Jarrett Renshaw

WASHINGTON The White House and congressional Republicans on Friday are putting the final touches on a deal that will raise the U.S. government's $31.4 trillion debt ceiling for two years while capping spending on everything but military and veterans, according to a U.S. official.

Negotiators for Democratic President Joe Biden and House of Representatives Speaker Kevin McCarthy appeared to be nearing a deal on Thursday as the two sides reached agreement on key issues, such as spending caps and funding for the Internal Revenue Service (IRS) and the military.

However, items including work requirements for recipients of federal aid were still holding up the deal, the official said.

The deal under consideration would increase funding for discretionary spending on military and veterans while essentially holding non-defense discretionary spending at current year levels, the official said, who requested anonymity because they are not authorized to speak about internal discussions.

The White House is considering scaling back its plan to boost funding at the IRS to hire more auditors and target wealthy Americans, the official said.

The defense and veteran affairs funding matches Biden's budget released earlier this year, a second U.S. official said.

The agreement would leave many details to be sorted out in the weeks and months ahead.

Each will have to persuade enough members of their party in the narrowly divided Congress to vote for any eventual deal, no small feat with far-right Republicans saying they wouldn't back any deal without sweeping spending cuts and progressive Democrats resisting new work requirements on anti-poverty programs.

"The only way to move forward is with a bipartisan agreement. And I believe we will come to an agreement that allows us to move forward and that protects the hardworking Americans of this country," Biden said on Thursday.

One of the Republican negotiators, Representative Patrick McHenry, said the two sides have aired their concerns and they are very well understood.

"That's why we're still here at the 11th hour fighting about serious things of serious consequence," he told reporters late Thursday.

One thing that has added to the complexity is that it is unclear how long lawmakers have to act. The Treasury Department was warned that it could be unable to cover all its obligations as soon as June 1, but on Thursday said it would sell $119 billion worth of debt that will come due on that date, suggesting to some market watchers that it was not an iron-clad deadline.

Most lawmakers have left Washington for the Memorial Day holiday, but their leaders have warned them to be ready to return for votes when a deal is struck.

Fast-growing health and retirement programs would not be affected, even though they are projected to push U.S. debt levels higher in coming years.

Republicans have rejected Biden's proposed tax increases on corporations and wealthy people, while Biden has resisted Republican proposals to stiffen work requirements in some antipoverty programs and loosen oil and gas drilling rules.

Republican negotiator Representative Garret Graves said late Thursday that the White House is "refusing to negotiate on work requirements," which he called "crazy." He said disagreements over funding social security and Medicare versus work requirements continues to be an issue between the two sides.

House leaders have said lawmakers will get three days to ponder the deal before a vote, and any single lawmaker in the Senate has the power to tie up action for days. At least one, Republican Mike Lee, has threatened to do so.

The standoff has unnerved investors, pushing the government's borrowing costs up by $80 million so far, according to Deputy Treasury Secretary Wally Adeyemo.

Several credit-rating agencies have said they have put the United States on review for a possible downgrade, which would push up borrowing costs even further.

(Reporting by Richard Cowan, Jarrett Renshaw, Nandita Bose, David Morgan, Moira Warburton and Gram Slattery, writing by Andy Sullivan; Editing by Scott Malone, Mary Milliken, Diane Craft and Lincoln Feast.)