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What the IRA budget increase for the IRS means for taxpayers
August 2022
In brief
The “Inflation Reduction Act” (the Act), signed into law by President Biden on August 16, includes an $80 billion appropriation in additional IRS funding that is projected to increase federal tax receipts by $204 billion over 10 years. Approximately half of the additional funding is allocated to enforcement; the other half is allocated to services and systems modernization. The Act states that these appropriated funds are to remain available until September 30, 2031.
Action item: Given that the IRS intends to use this additional funding to substantially increase examinations of large corporations, partnerships, and high-wealth individuals in the near future, taxpayers should begin to consider their readiness for such audits.
In detail
The Act appropriates an increase in IRS funding over 10 years as follows:
- $45.6 billion for enforcement activities, including:
- determining and collecting owed taxes,
- providing legal and litigation support,
- conducting criminal investigations (including investigative technology),
- providing digital asset monitoring and compliance activities, and
- enforcing criminal statutes related to violations of internal revenue laws and other financial crimes;
- $25.3 billion for operations support for taxpayer services and enforcement programs, including information technology development, enhancement, operations, maintenance, and security;
- $4.8 billion for business systems modernization, including development of callback technology and other technology to provide a more personalized customer service; and
- $3.2 billion for taxpayer services, including pre-filing assistance and education, filing and account services, and taxpayer advocacy services.
Treasury Secretary Janet Yellen sent an August 17 memorandum to IRS Commissioner Charles Rettig directing that the additional IRS enforcement funding provided for in the Act not be used to increase audits of small businesses or individuals with income under $400,000, but instead should be used “to end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.”
Yellen’s memorandum also directs the IRS to work with Treasury to develop a six-month operational plan identifying specific operational initiatives and associated timelines to improve taxpayer service, modernize technology, and increase equity in tax administration. This plan should detail how resources will be spent over the next 10 years on technology, service improvement, and personnel. It also must include metrics for areas of focus and targets that the agency will strive to achieve over the course of the coming years.
The Act also provides $15 million for the IRS to prepare and deliver a report to Congress on the cost of developing and operating a free direct efile tax return system. The report is to include:
- the projected cost (including options for differential coverage based on taxpayer adjusted gross income and return complexity) of developing and running a free direct efile tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data;
- taxpayer opinions, expectations, and level of trust, based on surveys, for such a free direct efile system; and
- the opinions of an independent third party on the overall feasibility, approach, schedule, cost, organizational design, and IRS capacity to deliver such a direct efile tax return system.
Observation: The Act permits Treasury to exercise greater flexibility with respect to personnel, including certain “direct hire” authority. After taking into account employee retirements, the new funding should allow the IRS to increase the size of its total workforce by 40 to 50% over 10 years. This, in turn, should lead to an increase in examination and collection activity, which has declined over recent years.
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