By Gary G. Wallace, CPA, Managing Partner
New IRS operation plan includes emphasis on tax compliance and enforcement
On April 6, 2023, the IRS and Treasury issued the IRS Inflation Reduction Act Strategic Operation Plan. Daniel Werfel, the new IRS Commissioner, highlighted the plans’ three main components: tax compliance, customer service, and technology updates. The 150-page plan includes 42 specific IRS initiatives. A high-level summary is included below.
1. Enhanced Focus on Complex Tax Return Compliance
The compliance efforts are once again raising taxpayer concerns on whether the IRS Army is coming to their front door.
Werfel discussed the plan for the enforcement and compliance component. “Funding from the Inflation Reduction Act… gives us the resources so [the IRS] can perform critical compliance work helping ensure fairness across income categories.” He specified that these enforcement efforts would start “at the top involving complex tax returns for wealthy individuals, large corporations, and big partnerships” and not apply to households making less than $400,000. The $400,000 audit threshold was a directive from Treasury Secretary Janet Yellen, which Werfel has vowed to follow.
Deputy Treasury Secretary Wally Adeyemo echoed this plan to focus on high earning taxpayers in a recent interview stating that the IRS hopes to increase audit rates on wealthy individuals to 2011 levels, before congressional Republicans slashed the IRS budget for five consecutive years.
Federal employment tax compliance
The IRS plan also contains items related to federal employment taxes. For example, the IRS says that in the future, taxpayers may engage with a “chatbot” with initial questions about how to file employment tax returns before requesting further assistance from an IRS agent.
With regard to enforcement, the plan details developing enforcement approaches and compliance treatments for tax types including federal employment taxes by refining tools and processes for auditing key areas and using improved analytics to identify patterns of noncompliance. The IRS notes that enforcement and compliance have been too low in employment tax, among other areas.
2. Customer Service Improvements
The IRS plan includes improvements to provide a better taxpayer service experience on the phone, online, and in-person.
- With the new funding, the IRS has added more than 5,000 phone assistants, and for the current filing season, the IRS has “consistently been able to provide an 80% to 90% level of phone service.” According to Werfel, call waits times at the IRS have been reduced to an average of four minutes. In 2022, average call wait times were 27 minutes.
- Some short and long-term changes include expanding in-person help and fully staffing all IRS Taxpayer Assistance Centers nationwide by 2024. Werfel also said that in the first five years of the IRS’ 10-year plan for the funding, taxpayers will be able to securely file documents, respond to notices online, and securely access and download their data and account history. “Taxpayers and tax professionals will have a clearer view of the tax information and easier ways to address issues with their tax return,” Werfel noted.
3. Technology Updates
IRS technology updates are planned to quickly address taxpayer issues, increase processing speed, and reduce errors.
- Enhanced technology will enable taxpayers to respond to IRS issues instantly by electronic means, and, “for the first time,” the IRS will help taxpayers identify credits and deductions for which they may be eligible. Taxpayers can also expect updated notices and forms to be more “user friendly” and available in more languages based on the needs of taxpayers.
- The use of digital scanning will reduce errors and increase the speed of processing refunds for paper tax return filers, the IRS will add more digital form scanning. Werfel said that the IRS is “already making incredible progress” on this project with more than 400,000 forms scanned. The IRS already announced digital scanning efforts with Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. He promised “even more” digital form scanning for the next filing season in an effort to eliminate paper form backlogs.
Another area where more digital scanning may help is with the 890,000 backlog of unprocessed Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund (as of March 29, 2023). Taxpayers may still make corrections, adjustments, or claim COVID-19 tax credits using this form, though the IRS has urged caution with the employee retention credit (ERC) as scam artists have been making claims of big tax refunds that may not be legitimate.
What can you do to prepare for a more compliance focused IRS?
Now more than ever, it will be important to keep your business and personal records in case of an IRS audit or other examination. Generally, you must keep your records that support an item of income or deductions on a tax return until the period of limitations for that return expires. However, retaining unnecessary records may cause a business or individual to exceed available storage space. Access our Record Retention Guide to help you determine which documents to retain and for how long.
We will continue to provide information on the tax and business implications of the IRS Operation Plan as well as other new or changing tax legislation that may impact you and your business.
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About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.