The Inflation Reduction Act included $80 billion in funding for the Internal Revenue Service and touched off a firestorm of speculation that the tax agency would ramp up audits and even begin sending armed agents into the field to collect tax bills.
However, tax experts say the internet rumors surrounding the bill range from misleading to flat-out wrong. In fact, some argue an infusion of cash into the IRS will actually benefit lower and middle-income taxpayers who have experienced long delays in the processing of paper returns and correspondence.
“It will help taxpayers have a better customer service experience,” says Miri Forster, national leader of the tax controversy practice for accounting firm Eisner Advisory Group LLC.
Not everyone is convinced there won’t be a bump in audits for middle-income families, but experts agree the IRS was due for a boost in funding and that it isn’t all bad news for taxpayers.
[Read: When You Should (and Shouldn’t) Worry if Your Tax Refund Is Delayed.]
An Underfunded Agency
While the $80 billion allocation to the IRS may have been a surprise to some in the general public, those working in the tax industry say it is long overdue.
“They have been slowly falling apart for years,” says Bill Smith, national director of tax technical services for CBIZ MHM’s National Tax Office. He notes that IRS staffing levels are lower than they were in 2010, which has resulted in lengthy paperwork processing delays. “Correspondence is just ridiculously slow,” Smith says.
In fiscal year 2019, the number of full-time workers for the IRS was 73,554 — a 22% decrease from its staffing level in fiscal year 2010, according to the Taxpayer Advocate Service, an independent organization within the IRS. During that time frame, 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 near retirement,” Forster says.
However, not everyone sees the influx of cash as simply a way to return employment and funding to previous levels. Scott Curley, CEO and partner of FinishLine Tax Solutions, believes the decision to increase funding for the IRS is at least partially related to rising inflation rates and increased government spending on assistance distributed during the pandemic.
“That created a situation for us,” Curley says. To pay for pandemic-related spending, he says the government had two choices: “Do we want to raise taxes more or do we want to go after the money owed to us already?” With the passage of additional funds for the IRS, Curley believes the government’s answer was the latter.
[Read: How to Survive an IRS Tax Audit.]
How IRS Funding Will Be Used
Within the Inflation Reduction Act, the $80 billion in additional funding for the IRS was broken down into four categories:
— Enforcement: $45.6 billion
— Operations support: $25.3 billion
— Business system modernization: $4.8 billion
— Taxpayer services: $3.2 billion
This money is available for allocation over a ten-year period ending in fiscal year 2031.
“We don’t know how they’re going to spend the money yet,” Smith says. He adds that some expect a new IRS Commissioner to be appointed this fall, and any decisions about how the money will be spent will likely wait until after the appointment is made.
Among tax professionals, the hope is that at least some money will go to updating IRS systems and improving response times. As of September 2022, the IRS says it has yet to process 7.2 million individual tax returns, which includes both 2021 returns and late filed prior year returns.
“Anything that is paper-filed is going into a basket of Armageddon,” Smith says. But it isn’t just a larger workforce that’s needed to process returns and bring the agency up to speed. “They have horrifically 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’s an absolute certainty,” Curley says.
At issue, though, is who might be on the receiving end of those audits. The IRS insists it will not be targeting low to middle-income households, but Curley says the law doesn’t make changes to the underlying rules guiding an automated system that flags returns for a potential audit. According to Curley, that could mean that, despite IRS assurances, some of those audits could be directed at middle-income households.
Hiring 87,000 IRS Agents Is Unlikely
Fanning the flames of concern about audits is the contention that the IRS will be adding 87,000 enforcement agents. “The general conception is that the IRS will double in size, but that’s a bit misleading,” Curley says.
The 87,000 figure originates from a 2021 report from the Department of Treasury that estimated increased IRS revenue could fund 86,852 additional workers by 2031. Smith points out that the report was just one suggestion of how money could be used and that those workers won’t necessarily be enforcement agents. That number could include people filling roles such as computer programming or customer service.
The IRS has repeatedly stated that any increase in enforcement efforts will target those earning higher incomes. The 2021 report states, “(A)udit rates will not rise relative to recent years for those earning less than $400,000 in actual income.”
In addition to high-earners, Forster says she anticipates international returns and those from partnerships to come under increased scrutiny in the years to come.
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Bottom Line for Lower-, Middle-Income Taxpayers
Exactly how the increased IRS funding will affect lower- and middle-income families remains to be seen, but some predict the net effect will be to the benefit of those in lower tax brackets.
“The IRS funding includes a plan to fund a free e-file system,” Forster says. That could be to the benefit of all taxpayers who file their own returns.
Additional workers may also mean a more responsive IRS. In Fiscal Year 2020, the IRS received 100.5 million calls but was only able to answer 24% of those, according to the Taxpayer Advocate Service. The organization argues that more money will mean a better experience for those who need customer service from the IRS.
Still, not everyone thinks all the changes will be positive. Curley worries some middle-class families may end up as the target of enforcement action. “The solid middle are the ones who will be affected the most,” he predicts.
Smith, on the other hand, doesn’t think lower and middle-income taxpayers need worry. “The audit rates are extremely low for taxpayers in that income range,” he says. “(They are) infinitesimally small.”
Experts anticipate the IRS will finalize its spending plan by early 2023.
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How Increased IRS Funding Will Affect Middle-, Low-Income Americans originally appeared on usnews.com
