[Updated January 2023 following Republican control of Congress] With Republicans now controlling the House of Representatives, they have proposed a measure to defund the $80 billion of IRS funding (over 10 years) that was included in the Inflation Reduction Act as discussed in earlier updates below.
The house measure to “defund” the IRS however is more symbolic and unlikely to pass in a Democratic-controlled Senate or be signed into law by the President. However it does allow political promises to be kept and sets the stage for future years should Republicans gain control of Congress and the presidency.
Planned changes announced by Secretary Yellen , per the earlier updates, will be moving forward in 2023.
Unfortunately the best long-term option “fix” is to simplify the overly complex and loop-hole riddled US tax code. More audits of the rich, with their high priced lawyers and accountants, is unlikely to structurally change things.
However doing nothing is not an option as the IRS is desperately underfunded and full of antiquated systems. which result in slow refund processing.
Until a bi-partisan compromise is reached, the IRS funding will always be a contentious issue and be a political ping-pong game.
IRS Upgrades and Improved Resourcing Plans
Following approval of the IRA, Treasury secretary Janet Yellen recently announced plans on how some of the $80 billion will be deployed at the IRS.
This includes the following commitments in the next six months, to get ready for the 2023 tax season:
- Triple staffing (vs pre-pandemic levels) at IRS Tax Assistance Centers to increase in-person services to taxpayers for the 2023 tax season. It is expected that every TAC will be fully staffed by next year.
- Hiring up to 5,000 additional call center phone representatives to lower taxpayer on-hold times by 50% or to less than 15 minutes. This will also help address challenges in getting a live IRS agent during tax season, given the millions of calls received daily.
- During the most recent filing season, the IRS averaged a 10-15% level of service, meaning that it answered less than 2 of every 10 calls. The extra funding to hire more call center representatives is expected to bring the IRS to a 85% level of service.
- Reduce the backlog and slow/manual processing of paper and prior year returns. This will be done by additional staffing and automating the manual process of scanning and uploading paper tax returns
- Various system upgrades to update the many legacy systems and process the IRS uses to process tax returns.
- Allowing tax filers to respond online to notices from the IRS, which currently can only be done via mail.
Despite the extra funding, the IRS like most employers is going to face a challenge in hiring the thousands of net new employees and ramping up staffing levels to meet the set goals for 2023.
Further upgrading systems is likely to take much longer and be harder than planned, if history is any track record.
I’ll update this article as more information is released and improvements are observed. I would say hope for the best, but plan for the worst.
Approval of $80 billion in Increased IRS Funding
Democrats and President Biden finally got additional funding for the IRS via the enacted Inflation Reduction Act (IRA).
The final bill allocated nearly $80 billion to the IRS over the next 10 years to cover additional enforcement/audit actions, improved taxpayer services (like more options to call the IRS), expanding cryptocurrency tax collection and modernizing of old IRS systems.
These actions are expected to raise between $150 and $300 billion in additional tax revenue over the next ten years and offset the cost of other spending initiatives in the bill related to climate change and lowering prescription drug costs.
However the question for many, with this extra $80 billion of spending, is will it improve the efficiency of the IRS in processing tax returns and paying refunds on time, or just more audits of tax filers and business to raise more revenue for the government.
Hopefully both is the actual answer once these spending measures are put in place.
Faster Refund Payments – Operations and Taxpayer Services
Delays in IRS tax refund processing and payments are well documented, with millions of tax payers experiencing long delays in get their current and past year refund payments.
The hope with the new funding is the IRS can add more people to service taxpayers, but more importantly upgrade antiquated systems and cybersecurity tools to increase the efficiency and speed with which returns are processed.
The funding will also be used to update IRS outreach programs and call centers, to ensure that sub-20% response rates to taxpayer inquiries does not continue.
Enforcement Actions (Audits) – $45.6 billion
IRS audits occur at varying levels of scrutiny, with the vast majority done by correspondence and not being what is depicted by the media as a bunch of agents descending on an unsuspecting taxpayer.
In fact the audit rate for individual tax filers was 0.25% in 2019, down from 0.9% in 2010, according to the US GAO. And this trend likely continued in 2020 and 2021, given IRS staffing constraints and processing backlogs.
The IRS will use the IRA funding to hire more IRS agents and legal team members, which coupled with improved technology (like AI and machine learning), will enable the IRS to catch more falsified or erroneous tax filings from current and past years.
A number of right wing media reports have already recently stated that nearly 87,000 new agents will be hired by the IRS to focus on audits, but this is is misleading as it is expected that over the next ten years nearly 60,000 current agents will leave or retire. So on a net basis, the increase is much less in terms of head count.
There was a concern that the additional enforcement actions will catch more lower income or “Walmart” shopping Americans, but per Treasury guidance from Secretary Janet Yellen, the extra funding will be targeting to higher net worth and corporations with households and small business’ earning less than $400,000 likely seeing the chance of an audit decline.
The was confirmed by IRS Commissioner Charles Rettig who told lawmakers last week that low- and middle-income taxpayers would not be the focus of increased enforcement action.
Further, he added that better technology and customer service would also make it less likely that compliant taxpayers would be audited.
Cryptocurrency Taxes Enforcement
Cryptocurrency trading and holdings will also come under greater scrutiny by the IRS, building on recent Congressional actions that required cryptocurrency brokers to report more information on their clients’ trading activity to the IRS starting in 2023.
The IRS will use the IRA funding to build out their systems, processes and monitoring mechanisms to capture unpaid taxes related to Crypto and other new decentralized financial instruments (like NFTs etc).
Oversight of IRA Spending by the IRS
Given the large amount of money the IRS will have its disposal, the Treasury (under which the IRS falls), would get over $550 million for internal and independent oversight.
Tax Software Providers
With the new enforcement and updated IRS systems, I expect that major tax software providers like TurboTax and H&R block will start offering more audit support given the complexity when claiming tax credits like the EITC and CTC, which may inadvertently cause tax returns to be flagged for audits.