The Inflation Reduction Act included $ 80 billion in funding for the Internal Revenue Service and sparked a storm of speculation that the tax agency would step up audits and even start sending armed agents to the field to collect taxes. .
However, tax experts say the internet rumors surrounding the bill range from misleading to completely wrong. Indeed, some argue that an infusion of money into the IRS will actually benefit low- and middle-income taxpayers who have experienced long delays in processing paper returns and correspondence.
“It will help taxpayers have a better customer service experience,” says Miri Forster, national leader of tax litigation practice for accounting firm Eisner Advisory Group LLC.
Not everyone is convinced that there won’t be an increase in audits for middle-income families, but experts agree that the IRS needed to increase funding, and that’s not all bad news for taxpayers.
An underfunded agency
While the $ 80 billion allocation to the IRS may have come as a surprise to some in the general public, those working in the tax sector say it’s long overdue.
“They’ve been slowly falling apart for years,” says Bill Smith, National Director of Tax Technical Services for CBIZ MHM’s National Tax Bureau. He notes that IRS staffing levels are lower than in 2010, which has resulted in long delays in processing paperwork. “Correspondence is just ridiculously slow,” says Smith.
In fiscal 2019, the number of full-time workers for the IRS was 73,554, a 22 percent decrease from its staffing level in fiscal 2010, according to the Taxpayer Advocate Service, an independent organization within of the IRS. During that time, the agency’s budget was also cut by 20.4% when adjusted for inflation.
“The IRS has been underfunded for years and many of its employees are close to retirement,” says Forster.
However, not everyone sees the inflow of money simply as a way to bring employment and financing back to previous levels. Scott Curley, CEO and partner of FinishLine Tax Solutions, believes the decision to increase funding for the IRS is at least in part related to rising inflation rates and increased government spending on distributed care during the pandemic. .
“This created a situation for us,” Curley says. To pay for pandemic-related expenses, he says the government had two choices: “Do we want to raise taxes or do we want to chase the money they already owe us?” By passing additional funds to the IRS, Curley believes the government’s response was the latter.
How the IRS funding will be used
Under the Inflation Reduction Act, the $ 80 billion in additional funding for the IRS was split into four categories:
- Application: $ 45.6 billion
- Operational Support: $ 25.3 billion
- Business system modernization: $ 4.8 billion
- Taxpayer Services: $ 3.2 billion
This money is available for award over a ten-year period ending in fiscal year 2031.
“We still don’t know how they’re going to spend the money,” says Smith. He adds that some are expecting a new IRS Commissioner to be appointed this fall and any decision on how the money will be spent will likely wait until after the appointment.
Among tax professionals, the hope is that at least some money will go into updating IRS systems and improving response times. As of September 2022, the IRS says it still needs to process 7.2 million individual tax returns, which include both 2021 returns and previous year’s late returns.
“Everything stored on paper ends up in an Armageddon basket,” says Smith. But it’s not just a larger workforce that is needed to process returns and keep the agency up to date. “They have horribly outdated IT systems,” according to Smith.
With more than half of the new funding earmarked for enforcement, many wonder if that means more audits will occur. “The short answer is that it’s an absolute certainty,” Curley says.
The problem, however, is who the recipient of such audits might be. The IRS insists it won’t target low- and middle-income households, but Curley says the law doesn’t make changes to the underlying rules that drive an automated system that reports returns for a potential audit. According to Curley, this could mean that, despite assurances from the IRS, some of these audits could be aimed at middle-income families.
Hiring 87,000 IRS agents is unlikely
Fueling the flames of audit concern is the argument that the IRS will add 87,000 law enforcement officers. “The general idea is that the IRS will double in size, but it’s a bit misleading,” says Curley.
The 87,000 figure comes from a 2021 Treasury Department report that an increase in IRS revenue could fund 86,852 additional workers by 2031. Smith points out that the report was just a suggestion on how to use the money and that those workers they won’t necessarily be executive agents. That number could include people in roles like computer programming or customer service.
The IRS has repeatedly said that any increase in enforcement efforts will target those who earn the highest incomes. The 2021 report states: “Revision (A) rates will not increase from recent years for those earning less than $ 400,000 in actual income.”
In addition to the high earnings, Forster says he expects international and partnership returns will be subject to greater scrutiny in the years to come.
Conclusion for low and middle income taxpayers
It remains to be seen exactly how the increase in IRS funding will affect low- and middle-income households, but some predict that the net effect will benefit those in the lower tax brackets.
“The IRS funding includes a plan to fund a free electronic file system,” says Forster. This could benefit all taxpayers who submit their returns.
Additional workers can also mean a more responsive IRS. In fiscal 2020, the IRS received 100.5 million calls but was only able to answer 24 percent of those, according to the Taxpayer Advocate Service. The organization claims that more money will mean a better experience for those who need IRS customer service.
However, not everyone thinks that all changes will be positive. Curley fears that some middle-class families may become the target of law enforcement. “The solid center is the ones that will be hit the most,” she predicts.
Smith, on the other hand, doesn’t think low- and middle-income taxpayers need to worry. “Audit rates are extremely low for taxpayers in that income bracket,” he says. “(They are) infinitely small.”
Experts predict that the IRS will finalize its spending plan by early 2023.