The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig state that the funds will not be used to burden small businesses or taxpayers with incomes below $400,000, although lawmakers on the other side of the aisle disagree.
Republican leaders led by House Minority Leader Kevin McCarthy (R-Calif.) have vowed to block the IRS from receiving the funds if they take control of Congress after the mid-terms. Democratic leaders have weighed in with their own priority list if the funding remains. Senate Finance Committee Chairman Ron Wyden (D-Ore.) sent a letter to Yellen and Rettig identifying his preferred uses for the IRS funds, discussed below.
Meanwhile, Treasury and the IRS are moving ahead with recently released modernization plans designed to address some startling statistics offered by Treasury Secretary Yellen:
- The IRS collects 96% of the revenue that funds the federal government.
- Since 2010, the IRS’s budget declined by 18%.
- As of April 1, 2022, the IRS processed more than 89 million individual federal tax returns and issued more than 63 million refunds totaling more than $204 billion.
- On March 15, 2021, the IRS received 8.6 million phone calls from taxpayers, which is an average of about 1,500 calls per second.
- The IRS workforce is the same size as in the 1970s with fewer auditors at any time since WWII.
- It takes the average American 13 hours to prepare a tax return.
- The IRS is still mostly a paper-based agency.
So, What’s the Plan?
Yellen outlined the elements of Treasury’s plan as follows:
Auditing More High-Income Earners. A portion of the funding will go toward “correcting this two-tiered tax system, where high earners play by different rules than working and middle-class families.” Yellen says more audits will be performed on high-income earners, citing data that, in 2019, the top one percent of Americans was estimated to owe over a fifth of unpaid taxes – totaling around $160 billion.
IRS Taxpayer Assistance Centers. The IRS intends to fully staff in-person IRS Taxpayer Assistance Centers, with triple the number of taxpayers served at these centers. Last year, the IRS served around 900,000 Americans face-to-face. In the coming 2023 filing season, the IRS is projected to serve at least 2.7 million people.
Phone Service. The IRS will hire 5,000 additional customer service representatives. Recently, the IRS only averaged a 10-15% level of service, meaning that it answered less than 2 of every 10 calls. In the next filing season, the IRS is committing to an 85% level of service. Over five times the number of calls will be answered, and phone wait times will be cut in half – from an average wait of 30 minutes during the 2022 filing season to less than 15 minutes.
Digital Upgrades: Now, employees at the IRS still manually transcribe many paper returns. Next year, the IRS will automate the scanning of millions of individual paper returns into digital copies. For taxpayers, this means faster processing and faster refunds. The IRS also will build online capabilities to enable taxpayers to receive and respond to notices online.
Advice from Industry Leaders. Treasury will convene industry-leading customer service experts from the private sector to get their perspectives on the IRS modernization effort.
Senate Finance Leader Sets Expectations
Influential Senator Wyden has added his own wish list to Treasury’s priorities for the uses of the IRS increased funding, including more detail on where enforcement activities should be targeted. For example, Wyden wants the IRS to “ramp up its audits” on multi-tiered partnerships and those with cryptocurrency and offshore accounts.
“The IRS should hire enough revenue agents to audit wealthy taxpayers (including passthroughs) at a significantly higher rate than EITC claimants, “ Wyden contends. The IRS also should rebuild the IRS Criminal Investigation Division (CI) to bring criminal tax prosecutions to “provide a strong deterrent to would-be tax evaders.”
The IRS programs that are likely to be put in place first are the programs related to customer service, such as call answering and in-person help centers. Hiring and training auditors for complex returns is a longer-term process. High-wealth taxpayers should be aware that their returns may get more scrutiny in the coming years, especially those reporting offshore accounts, complex partnerships and cryptocurrency investments.