New Funding May Revitalize IRS

inflation reduction actThe Inflation Reduction Act recently signed into law provides a major budget boost to the Internal Revenue Service (IRS).


For years, the National Taxpayer Advocate has cited the deleterious impacts of an underfunded IRS. The Taxpayer Advocate Service (TAS) is an independent body within the IRS that advocates for taxpayers and businesses in their dealings with the IRS. At first blush, a teetering IRS may seem useful to those who resent paying taxes. Yet the lack of budget packs a bite that does not necessarily correspond with reduced enforcement efforts—just slower or non-existent service.


In a 2012 report, the TSA identified chronic issues caused by underfunding of the IRS, including:

  • Consumers believe tax laws are not being applied fairly across the board.
  • Millions of taxpayers are unable to obtain information from the IRS by telephone. Today, most callers to the IRS are unable to obtain help from the IRS via phone.
  • Underfunding creates significant backlogs. While this was the case in 2012, the backlog has amplified in the passing years causing taxpayers to receive late refunds and untimely notice of issues with their tax returns.
  • The tax gap—or the amount of tax owed but not collected—remains at about $400 billion per year—funds that are not available for government programs and expenses. 


The 2012 report refers to the 2006 TAS Annual Report to Congress which cited similar concerns.  Yet Congress continued to decrease the IRS budget or refuse to provide adequate funding, while expecting the IRS, the largest agency of the U.S. Treasury, to perform as required. In 2020, the IRS distributed pandemic-mandated relief measures without technological or workforce relief. 


Enacted in August, the Inflation Reduction Act provides $79.6 billion to the IRS over the next decade. Treasury Secretary Janet Yellen immediately directed IRS Commission Charles Rettig to develop a plan within six months that implements four priorities, which include:

  1. Boost the IRS workforce to address employees expected to retire within five years. With a 2021 workforce of approximately 78,000, the agency expects 50,000 retirements in the upcoming years.
  2. Retire legacy systems and overhaul outdated IRS technology.
  3. The dire lack of customer service to taxpayers is a top priority. In 2021, the agency answered approximately 11 percent of customer calls.
  4. Secretary Yellen expects the IRS to clear its backlog of unprocessed returns and correspondence. As of early August, there were 9.7 million unprocessed returns from 2021.


As to the question on everyone’s mind—Secretary Yellen cautioned Mr. Rettig that additional funds provided to the agency “shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels. This means that, contrary to the misinformation from opponents of this legislation, small business or households earning $400,000 per year or less will not see an increase in the chances that they are audited.”


Added Secretary Yellen, the IRS is directed to “pursue a robust attack on the tax gap by targeting crucial challenges, like large corporations, high-net-worth individuals and complex pass-throughs, where today the IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns received.”


Proper funding of the IRS is essential to the proper governance of the United States. This legislation is also a heads-up that we may see a change in enforcement priorities of the IRS toward high-wealth taxpayers and corporations engaged in questionable offshore tax activities, tax fraud, and other tax controversies.


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