New Funding for the IRS Raises Questions for Taxpayers
The Inflation Reduction Act of 2022 (the Act) was signed into law on August 16, 2022, by President Biden. A hot-button issue resulting from the Act is the nearly $80 billion in funds appropriated to the Internal Revenue Service. A growing concern is that these funds will be used to increase scrutiny on the average American taxpayer, creating even more contempt for an already under-fire government agency. Questions being asked include Does this mean I am going to get audited?, What does enforcement look like under the Act?, and How will the IRS find the resources?
How will the IRS funds be used?
Recent estimates have indicated that these funds will be used to hire 87,000 new IRS employees. According to IRS officials, IRS Enforcement FTEs have decreased by 30 percent since 2010, while real Gross Domestic Product has increased by 29 percent, and the filing population has increased by 14 percent. This is not the recipe for a great relationship between the IRS and taxpayers.
From a real-world perspective, CPA firms and taxpayers alike have seen the noticeable drop in recent years related to timely tax return processing and the overall lack of quality customer service by the IRS.
To gain a better understanding of how the funds appropriated under the Act will be used, here is the following breakdown of the expected expenditures:
- $45.6 billion for tax enforcement activities
- $25.3 billion for operations support
- $3.2 billion for taxpayer services
- $4.8 billion for business system modernization
- $700 million for oversight and administration of the funds
Addressing a growing tax gap
The Act aims to remedy many issues that have impacted the IRS while increasing enforcement and raising revenues. According to a report by the Joint Committee on Taxation dated June 7, 2021, the average annual tax gap for tax years 2011-2013, was $441 billion. More recent commentary from IRS commissioner Charles Rettig puts the tax gap at a potential $1 trillion and growing.
What is the “tax gap”?
A standard definition of the tax gap is the shortfall between the amount of tax voluntarily and timely paid by taxpayers and the actual tax liability of taxpayers. It measures underreporting, underpayment, and non-filing.
President Biden’s compliance agenda
According to a report from the US Department of Treasury in May 2021, the President’s compliance agenda has several transformational elements:
- Providing the IRS the resources it needs to address sophisticated tax evasion which includes modernizing information technology, improving data analytic approaches, and hiring and training agents dedicated to complex enforcement activities
- Providing the IRS with more complete information which includes strengthening third-party reporting
- Overhauling outdated technology to help the IRS identify tax evasion and serve customers which includes developing innovative machine learning and supporting the efforts needed to meet threats to the security of the tax system (i.e. cyberattacks)
- Regulating paid tax preparers and increasing penalties for those who commit or abet evasion
Experts at the Treasury Office of Tax Analysis estimate that these initiatives would raise $700 billion in additional tax revenue over the next decade.
Unfortunately, results will likely not be immediately noticeable for several reasons. The first of which is that the funds are appropriated over 10 years. Thus, the results from these efforts will take years to be realized. Second, and perhaps equally as important, is the IRS needs to find, hire, and train these employees. This could prove difficult in the current employment environment.
The message today is this: Fear Not! You will not wake up tomorrow morning with an IRS agent interrupting your morning coffee. In the best-case scenario, the IRS uses these funds to provide better customer service, process tax returns in a timely fashion, and be prepared for the twenty-first century with new technology and security to protect our privacy and our financial information. Such support will likely have a positive impact on collections. The changes in their enforcement processes will ensue but we won’t know what that will look like for a while.
We will continue to provide information on the tax and business implications of the Act as well as other new or changing tax legislation that may impact you and your business.
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.