4 minute read
FEDERAL LEGISLATION
$80 Billion to Spend — What Should We Expect From the IRS?
When the Inflation Reduction Act of 2022 was signed into law last August, it ushered in a new era of IRS funding that will support the agency over the By Robert B. next 10 years. Broadly speaking, the nearly $80 billion granted Teuber, JD to the IRS under the act will be spent as follows: • $3.2 billion for taxpayer services • $25.3 billion for IRS operations support • $4.8 billion for business systems modernization • $45.6 billion for enhanced enforcement activities
Taxpayer services
As all tax practitioners are well aware, the IRS failed terribly in providing adequate support and services to the taxpaying public during the COVID-19 pandemic. This is not entirely the fault of the agency itself. The agency was still struggling with backlogs caused by stagnant funding, a consistently shrinking workforce and the longest-ever government shutdown in 2018–2019. This made the agency entirely unprepared for the burdens 2020 and 2021 would bring. At the end of the 2020 filing season, the IRS had 35.8 million unprocessed returns. This astonishing figure had only decreased to 13.3 million by the end of the 2021 filing season. As of November 2022, 4.2 million returns still remained unprocessed. Phone service was also severely limited during 2020 and 2021, with the IRS answering only 19% and 18% of all calls in 2021 and 2022, respectively. The reasons for these shortcomings were many but included a substantial amount of added responsibilities placed upon the agency in administering pandemic relief programs. The $3.2 billion in funding allocated for taxpayer services is intended to help remedy these issues by focusing on filing and account services, prefiling assistance and education. The IRS has already hired 4,000 new customer service representatives to help answer phones and provide other services. An additional 1,000 customer service representatives were expected to be employed by the end of 2022. The IRS is also working to hire 700 new employees to fully staff its 270 walk-in Taxpayer Assistance Centers for the first time in a decade. Of the $3.2 billion allocated to taxpayer services, $15 million is to be used to investigate whether the IRS should create its own free, direct e-file program for taxpayers.
Operations support
The $25.3 billion dedicated to operations is intended for the payment of rent, facilities, security, telecom, information technology and other operations expenses.
Business systems modernization
The $4.8 billion allocated for system modernization is intended to implement a system upgrade plan for taxpayer services, operations and cybersecurity. The funds are expected to be used to further develop automated callback systems for phone lines. The funds are not to be used for the maintenance and operation of “legacy” systems.
Enforcement
While practitioners will appreciate improvements to taxpayer service and system modernization, the tax-paying public is more concerned with what the $45.6 billion dedicated to enforcement will be used for. The news often cites 87,000 as the number of additional employees needed to rebuild and revitalize the IRS. This does not necessarily mean that the IRS is hiring 87,000 additional revenue agents, revenue officers and/or special agents to focus on audits, collections and criminal investigations. In testimony before Congress in 2021 (when the IRS hoped to receive funding through the proposed Build Back Better legislation), Commissioner Charles Rettig explained that the new hires are intended to replace an anticipated 52,000 employees due to attrition over the coming six years and to rebuild following staffing declines over the last decade. He also emphasized that the new hires would include appeals officers, taxpayer advocate representatives and IRS counsel across all experience levels. Nevertheless, to achieve its projected $203 billion in gross tax revenues ($123 billion net) over the next 10 years, considerable enforcement efforts will be necessary. The funds dedicated to enforcement are also expected to include investment in “investigative technology.” Such technology is expected to be used to help better identify which taxpayers to audit through the use of data. Conceptually, better data analytics can reduce the number of “no change” audits by not auditing those taxpayers in the first place and focusing on those audits likely to yield adjustments. The IRS has also explained its intention to use a portion of the enforcement funds to monitor and enforce taxes on digital assets such as cryptocurrencies. Given the new (and broad) information reporting requirements for digital assets under the Infrastructure Investment and Jobs Act, as well as the inclusion of digital assets in the Treasury Department’s 20222023 Priority Guidance Plan, we can anticipate a considerable amount of the funding being dedicated to these purposes. Not all increased activities will deal with digital assets, and most increased audit activity will resemble more traditional forms. But who will be the target of the increased audit activity? Shortly before his exit from the agency, IRS Commissioner Rettig explained that the IRS had developed its strategy around an agency directive that audit rates for households making less than $400,000 should not rise relative to recent years. While not written into law and subject to change based on compliance trends or other pressures, if the directive is followed, we can expect that the IRS will stick to its expressed plan to focus audits on high-net-worth individuals, large pass-through entities, large corporations, employment taxes, transfer pricing, non-filers, cash payments over $10,000 and abusive transactions.
Rob Teuber, JD, is a shareholder with the law firm von Briesen & Roper s.c. in Waukesha and Milwaukee. Contact him at 414-270-2538 or robert.teuber@vonbriesen.com.
