The recently passed Inflation Reduction Act includes $80 Billion in funds over the next 10 years to overhaul the IRS. The IRS and proponents of the funding are promising long-overdue upgrades to taxpayer services, enforcement, and technology. Critics have raised concerns that the emphasis on enforcement will result in more audits for average Americans.
In this post, we’ll have a look at what this $80 billion raise means for the IRS and the extent to which it will affect taxpayers like you.
Current IRS Budget and Staffing
Despite its formidable reputation and the vital role it plays in funding the government, the IRS’s budget has been cut by 20% (adjusting for inflation) since 2010. Its staff has been cut by 38% over the same period.
Its workload, however, has gotten heavier. Over the past two years, the IRS has taken on the administration of programs related to the pandemic, including stimulus checks, advance child tax credit checks, and emergency rental assistance.
The combination of more work and fewer workers led to the organization’s worst backlog in history this past tax season. As of September 16, 2022, there were still 6.9 million individual returns received by the IRS in 2022 that had not yet been processed.
The decrease in enforcement staff, along with legal changes, has made it more difficult to follow up on tax fraud. As a result, the number of audits has dropped from 0.9% to 0.25% since 2010. While fewer audits may not seem like something to complain about, the loss in tax revenue is significant: the Department of the Treasury estimates a $600 billion annual tax gap, referring to the difference between taxes that are owed and taxes that are actually collected.
Proponents of the new funding hope that it will mean better services for taxpayers, better enforcement, and more money for government programs.
Delayed returns aren’t the only issue taxpayers face. If you’ve tried to call the IRS over the last few years, odds are you were on hold for a while—if your call got answered at all. According to the National Taxpayer Advocate, an independent organization within the IRS that advocates for taxpayers, IRS employees were able to answer only 24% of the 100.5 million telephone calls they received in 2020, with hold times averaging 18 minutes.
Taxpayer Assistance Centers (TACs) have also felt the crunch, with more than one in four having closed due to lack of staffing. About half of the remaining TACs are still understaffed with hours subject to worker availability.
The new funding is expected to streamline taxpayer services, making for faster, less frustrating experiences all around. The IRS plans to hire 5000 new customer service representatives to increase the number of calls that get answered while decreasing wait times. It will also focus on tripling the number of taxpayers served in person at TACs from 900,000 in 2022 to 2.7 million in 2023.
Finally, the agenda item that may be causing Americans the most concern is a renewed emphasis on audits. More than half the money, $45.6 billion, has been earmarked for enforcement.
The number of audits, especially of wealthy taxpayers, has fallen substantially over the past decade. Americans earning more than $5 million a year have a 2% chance of being audited, down from 16% in 2010. While critics of the funding have suggested that it will result in more audits of working-class and middle-income families, the IRS and Yellen have pledged that the service’s focus will be on high-end noncompliance, claiming that’s where the majority of the “tax gap” can be found.
“I’ve directed that enforcement resources will not be used to raise audit rates for households making under $400,000 a year relative to historical levels. In fact, we expect audit rates for honest taxpayers to decline, once the IRS has the right technological infrastructure in place.”
—Janet Yellen, Secretary of the Treasury
The Congressional Budget Office (CBO) estimates that improved enforcement could save the Government $101 billion over the next year alone. While much of the discussion about this aspect of the funding has focused on the enforcement agents that the IRS will no doubt hire, at least part of this budget will almost certainly go toward legal counsel and representation as well as technological support.
“Today, the digits on every paper return must be manually keystroked into IRS systems by an employee. In the year 2022, that doesn’t just seem crazy. It is crazy.”
—Erin M. Collins, National Taxpayer Advocate
In the early 1960s, the IRS pioneered the use of automated data processing to keep track of taxpayer account information. More recently, however, the Service has been criticized for its reliance on legacy technology, which has led to higher costs, equipment failures, and a shortage of staff that know how to work with outdated systems. One of the reasons that so many tax returns have been delayed this year is that over 21 million paper returns have had to be entered into the computer system by hand, an incredibly time-consuming process.
Increased funding will allow the IRS to automate the scanning of millions of paper returns, thus speeding up refunds. On a broader level, it will be able to modernize its systems and strengthen cybersecurity protections with new technologies such as Cloud, Agile, DevOps, Application Programming Interfaces, robotic process automation, and next-generation infrastructure. Updates will be done in the Java programming language, making it easier for the service to find and hire qualified staff.
Better, more modern technology will support both the IRS’s service and enforcement goals by creating a faster, more accurate, and more efficient system.
What does it all mean for you?
For most of us, the IRS’s rise in fortunes should mean faster refunds and better service from call centers and TACs. Yellen has said that taxpayers should start to see an improvement in service as soon as next tax season.
It remains to be seen what the overall impact on enforcement will be. Hopefully, individuals in lower tax brackets won’t see a jump in the number of audits, but it seems likely that wealthier individuals as well as larger businesses and corporations may come under increased scrutiny.
As always, we encourage our clients, whether businesses or individuals, to seek qualified tax advice.