The IRS revealed portions of its strategic operating plan to spend the $80 billion it was allocated over 10 years in the Inflation Reduction Act of 2022, P.L. 117-169. The plan provides budget information for three fiscal years during which the bulk of the money goes to operations support.
In a call with reporters Thursday, Deputy Treasury Secretary Wally Adeyemo and IRS Commissioner Danny Werfel stood firm on the Service's plan to increase audits of complex cases and not increase audit rates on those making under $400,000 annually.
The $8.7 billion IRS spending plan for fiscal years 2022, 2023, and 2024 includes almost $3.5 billion (40%) for operations support; $1.78 billion for enforcement (20%); and almost $1.7 billion each (19%) for business systems modernization and taxpayer services.
Adeyemo and Werfel said the three-year budget makes sense because circumstances and needs will change as improved technology changes the focus. For example, fewer workers will be needed to key in paper returns, or people answering phones could be assigned to taxpayer assistance centers as more processes are automated.
"Part of this is us being deliberate because we don't want to be locked into numbers on a piece of paper," Adeyemo said. "Because we do want to see the benefits we get from technology and how we can build a flexible workforce that will help us meet the needs of the American people and also help us bring in revenue going forward."
The long-term reduction in staffing and resources at the IRS took a hit at enforcement, where the agency has 2,600 agents who work directly on cases involving certain individuals, large corporations, and large partnerships, Werfel said. That compares with nearly 5,000 of these agents in 2010.
Meanwhile, the number of individuals making over $10 million increased to 30,600 from 13,300 a decade ago. The number of large partnerships and S corporation filings jumped to 300,000 from about 175,000, he said, so the IRS needs to concentrate on those both to catch up and to help close the tax gap, which averaged $496 billion per year for tax years 2014 through 2016.
The IRS will not exceed the historic audit rate for people earning under $400,000 a year, Werfel reiterated.
"People who get a W-2 or Social Security payments or have a small business should not be worried about some new wave of IRS audits," he said. "We're taking that off the table. Our focus will be on other high-dollar areas for quite some time because there's a lot of work to do in those more complex areas of tax law that will take years to accomplish."
A look at the plan's operational details
Specific highlights from the plan include:
- The IRS says it now provides a customer callback option for 75% of calls to IRS live assistance toll-free telephone lines and plans to expand coverage to 95% of taxpayers calling for toll-free live assistance by the end of July 2023.
- Taxpayers will have access to secure online accounts where they can view account and profile information, make changes, interact with the IRS, and manage preferences for payments, refunds, and communications.
- The IRS will expand capacity in the Office of Chief Counsel and within the Department of the Treasury Office of Tax Policy to address more taxpayer questions proactively, using both formal and informal legal guidance and rulings.
- The IRS will allow tax professionals to view status information for their clients. It will also give taxpayers the ability to authorize tax professionals to track status information for them through the online Tax Pro Account platform.
- The IRS will send taxpayers notifications about potential issues as they file returns to help them correct errors and claim credits and deductions for which they are eligible.
- It will add digital copies of all notices to online accounts and create digital copies of all notices so that taxpayers and authorized third parties can access them online.
- Implementation will be coordinated by a newly formed Transformation and Strategy Office that will support IRS leadership.
The Inflation Reduction Act, which was enacted in August 2022, allocates almost $80 billion to the IRS, to be spent over 10 years, in addition to the Service's annual funding. Of that money, $45.6 billion was allocated for enforcement, $3.2 billion for taxpayer services, $25.3 billion for operations support, and $4.8 billion for business systems modernization. The IRS spending plan's $79.4 billion in proposed investment over 10 years includes $4.3 billion for improved taxpayer services and $3.2 billion to "quickly resolve taxpayer issues when they arise"; $12.4 billion to "deliver cutting-edge technology, data, and analytics"; $8.2 billion for workforce training; and $3.9 billion to support the implementation of the energy tax incentives outlined in the Inflation Reduction Act.
Treasury Secretary Janet Yellen requested a spending plan in August 2022, setting a six-month deadline, which the IRS missed. The 150-page plan submitted Thursday has five primary objectives: improve taxpayer experience; quickly resolve taxpayer issues; expand enforcement efforts on high-income taxpayers and large businesses to address the tax gap; operate more efficiently by delivering cutting-edge technology; and hire and retain a skilled workforce.
In a letter written March 28, the AICPA called on the IRS to put a stronger focus on service and reduce the processing backlog to healthy levels.
In the letter, signed by Jan Lewis, CPA, chair of the AICPA Tax Executive Committee, the AICPA expressed concern with current low levels of IRS taxpayer services. "Taxpayers' and practitioners' experiences with the IRS over the last three years demonstrate the need for additional focus on customer service. We understand that enforcement is an important aspect of the responsibilities of the IRS and critical to a voluntary compliance tax system. However, we believe there is an imbalance … between enforcement and service," the letter said.
National Taxpayer Advocate Erin Collins wrote in a blog post March 16 that the Inflation Reduction Act "allocated the funds in a manner that does not address the needs of U.S. taxpayers, including individuals, families, and businesses."
But she was more enthusiastic when she spoke Thursday at an AICPA Town Hall. Having long-term funding instead of year-to-year appropriations "makes a huge difference in how you can plan," she said. "So I think it's going to give the IRS the possibility of really coming up with different and novel ideas as to how we can do things better."
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.