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Accounting

Understanding the Inflation Reduction Act of 2022

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

How $80 billion in IRS funding will be used

On August 16, 2022, the Inflation Reduction Act was signed into law by President Biden. One of the provisions of this legislation that received a significant amount of media attention was the additional $79.6 billion in funding to the Internal Revenue Service. This funding is intended to supplement, not replace, the normal annual appropriations of the IRS.

So, how will the $80 billion infusion into the IRS be spent? According to the nonpartisan Congressional Research Service (CRS), the money will be parceled out among four key priority areas: 1. taxpayer services ($3,181,500,000); 2. enforcement ($45,637,400,000); 3. operations support ($25,326,400,000); and 4. business systems modernization ($4,750,700,000). These appropriations are to remain available through the end of 2031.

To better understand how the Inflation Reduction Act funds will be used and the ways in which they may affect clients, let’s take a deeper look at each of these four priority areas.

1. Taxpayer Services

According to the CRS, the number of unprocessed tax returns at the end of the 2022 filing season rose from 7.4 million in 2019 to 35.8 million in 2021 and 13.3 million in 2022.

The money dedicated to taxpayer services will help the IRS improve pre-filing assistance and education, filing and account services, and taxpayer advocacy services.

In addition, the IRS will use $15 million of this money to fund a task force that will study the cost and feasibility of creating a free direct e-file program. Previously, the IRS partnered with private tax filing software companies to provide free services to low and moderate income taxpayers. However, only about 4% of eligible taxpayers used the private providers to file their taxes in 2020.

2. Enforcement

Perhaps the question that is most top of mind for clients has to do with the funds aimed at tax enforcement activities which make up more than half of the total IRS appropriations. According to the CRS, these funds will cover hiring more enforcement agents, litigation and criminal investigation expenses, and investing in investigative technology.

Clearly, the question from clients is, “Will I be audited?” When we look at projections on audit rates, it appears, at least from the taxpayer perspective, that the focus will be on the $400,000 taxable income threshold and up. While enforcement activities are squarely aimed at super-high wealth taxpayers, large corporations, and sophisticated partnerships, it will take the IRS some time to hire and train additional agents, so don’t expect audits to rise overnight.

According to the CRS, the overall goal of this significant investment in tax enforcement is to reduce the tax gap which is the difference between total taxes owed and taxes paid on time. The IRS estimates that the tax gap averaged $381 billion after accounting for enforcement between 2011 and 2013, the most recent years available. The Congressional Budget Office (CBO) estimates that the additional enforcement measures funded by this bill would generate $204 billion in revenues through 2031, although this estimate is highly uncertain.

Another interesting piece of enforcement activity involves cryptocurrency and digital asset monitoring. With more than 15,000 different types of digital assets, these transactions have largely flown under the radar in terms of reporting. Under new legislation, cryptocurrency brokers will be required to report more information on their clients’ trading activity to the IRS starting in 2023.

3. Operations Support

To support the investment in taxpayer services and enforcement, the IRS is also focused on enhancing operations. This includes routine costs such as rent payments, facilities services, postage, security, research, telecommunications, maintenance, and information technology development.

These funds may also go toward research and the IRS Oversight Board, an independent body charged with providing the IRS with long-term guidance and direction.

4. Business Systems Modernization

We all know the business systems and technology used by the IRS are decades behind, particularly when it comes to answering the phone.

In 2019, IRS customer service representatives answered 59% of phone calls they received, but in 2021 and 2022, they answered only 19% and 18% respectively. According to the June 2020 National Taxpayer Advocate Annual Report to Congress, it was recommended that the IRS prioritize the expansion of customer callback technology and give taxpayers the option of receiving face-to-face service through videoconferencing.

According to the CRS, the business systems modernization piece of the overall funding will include the development of callback and other technology designed to provide a more personalized customer service experience. It does not include, however, the operation and maintenance of legacy systems.

In 2019, the IRS released a plan to upgrade its business systems that administer taxpayer services, operations, and cybersecurity. These new funds could be invested in these areas and may include upgraded technology like online secure portals, the ability to view client tax payments, and secure email correspondence with tax practitioners.

Other appropriations of the Inflation Reduction Act

The Inflation Reduction Act also gives other Treasury offices $557.5 million to oversee the administration of these new IRS funds. Of that amount, $403 million goes to the independent IRS watchdog agency known as Treasury Inspector General for Tax Administration (TIGTA), $104.5 million goes to the Office of Tax Policy, and $50 million goes to the Treasury Departmental Offices.

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