On August 16th of last year, while some of us were probably relaxing by the pool, Congress passed the Inflation Reduction Act of 2022. Although its name might be a misnomer, as the Penn Wharton Budget Model stated that the impact on inflation is statistically indistinguishable from zero, the act resulted from final negotiations on the previously proposed Build Back Better Act. One of the many provisions included in the bill was funding an additional $80 billion in IRS budget spending over the next ten years, which the Congressional Budget Office estimated would yield $180 billion in additional revenue for a net savings of $100 billion.
Of the $80 billion of spending appropriations, Congress authorized the largest allocation to enforcement at $46 billion, which by far, has attracted the most attention. In addition, $25 billion would go towards operations support, $5 billion to business systems modernization, and $3 billion to taxpayer services. This budget increase is expected to narrow the tax gap, or the amount of taxes that are owed but not collected, which was last estimated by the IRS to be $540 billion.
A recent report released by Syracuse University’s Transactional Records Access Clearinghouse found that in the fiscal year 2022, the IRS audited 626,204 returns (out of more than 164 million individual income tax returns filed), down from 659,003 during FY 2021. Due to a lack of resources, the IRS has increasingly relied on correspondence audits instead of face-to-face exams. Only 93,595 of the audits were regular audits, compared to 532,609 correspondence audits.
One area where the Internal Revenue Service has struggled greatly is due to the use of outdated software. Some of its computer systems are so antiquated, a federal watchdog complains, “that it’s difficult to find people who know how to work them.” In one example, a Government Accountability Office report released recently notes the tax agency’s use of the ‘’obsolete programming language’’ called COBOL as well as other program applications 25 to 64 years old.
National Taxpayer Advocate Erin M. Collins recently stated that paper is the IRS’s “Kryptonite,” meaning that paper returns received from taxpayers must be processed manually because technology is not currently available to machine read the information, so each digit on every paper return must be manually keystroked into their software program by an employee. In addition, the Taxpayer Advocate Service (TAS), which Collins oversees, and is an independent organization within the IRS, concluded in its recent report to Congress, “the IRS is materially different from other discretionary government programs in that it serves as the “de facto” Accounts Receivable Department of the federal government. Each dollar appropriated for the IRS generates substantially more than one dollar in additional revenue. It is therefore ironic and counterproductive that concerns about the deficit lead to proposed cuts in the IRS budget when those cuts result in making the deficit larger.”
In fiscal year 2021, the IRS reported having over 78,000 full-time equivalent employees. Most of the expected 87,000 new IRS hires will be revenue agents, employees who perform audits of returns. Other staff levels include revenue officers, who are tasked with collecting delinquent taxes, as well as CI special agents, who specialize in criminal investigation and are also trained in the use of firearms. But many will also fill lesser roles. Five thousand new employees were hired prior to the 2023 filing season as customer service representatives, resulting in lower wait times on the phone for taxpayers and tax professionals. The agency has also acknowledged that it has been “ill-equipped to unpack complex and intricate returns of high-income taxpayers and corporations and thus has been unable to close the tax gap.” Moreover, IRS leadership said it would commit to not increasing tax audits on businesses and households making less than $400,000 annually.
In closing, it will take time for the IRS to phase in this new funding and hire and train all 87,000 new employees. Let’s hope that with this new infusion of resources, the IRS will be able to vanquish its Kryptonite nemesis of paper-filed tax returns and that Superman can arrive just in the nick of time and save taxpayers from the curse of substantial underpayment penalties.