A year after releasing its game plan on how it intends to spend additional funding from the Inflation Reduction Act (PL 117-169), the IRS touted its recent transformation efforts and provided an update to future modernization plans to capitalize on what the agency says was a successful tax season.
How we got here.
The Inflation Reduction Act, enacted August 2022, authorized approximately $80 billion to the IRS over a 10-year period on top of its annual appropriation. Former IRS Commissioner Chuck Rettig during his term advocated for the agency to receive more budgetary support to course-correct from a year-to-year decline of resources across the board since 2010, including reduced numbers of customer support representatives, return processors, and compliance personnel capable of longer, more complicated audits.
Most of the inflation bill funds went towards enforcement enhancements and operations support, while smaller amounts were carved out for bringing IRS systems into the 21st Century and bolstering taxpayer services.
Last April shortly after current Commissioner Danny Werfel took the reins, the IRS released its “Strategic Operating Plan” setting initial short- and long-term goals for what it hoped to accomplish with the Inflation Reduction Act funding. Since then, multiple rescissions have clawed back a total $21.6 billion, leaving the agency with roughly $57.3 billion, according to a Congressional Research Service document summarizing the IRS’ fiscal 2025 appropriation.
Biden hopes to fully restore the clawed-back amounts. For the IRS’ annual budget, though, the funding request for 2025 remains at $12.32 billion, the same as the prior two years. An estimate from the Congressional Budget Office forecasted a $20 billion rescission would cost $43.6 billion in federal revenues through fiscal year 2034.
“To address these concerns, the IRS proposes in its FY2025 budget request to extend mandatory funding through FY2034 with another $104 billion between FY2024 and FY2034, making total IRS mandatory funding (including rescissions) from FY2022 to FY2034 equal to $162 billion,” wrote CRS Analyst in Public Finance Gary Guenther in the report published April 29.
The Strategic Operating Plan, or SOP, faced pushback for lacking specific enough details and metrics for its wishlist of modernization campaigns, but it was the first look at what was coming down the pipeline under Werfel.
One year later.
On May 2, the IRS released a one-year progress report to serve as the first of what will be a yearly update on the state of the various objectives outlined in the SOP. A longer supplemental document accompanied the update covering future priorities for fiscal years 2024, 2025, and beyond.
“We have seen an incredible amount of progress since we received this funding,” Werfel told reporters the morning of the release. “This opportunity is important for the future of the IRS, the nation, and especially the taxpayers we serve. It is, in essence, a generational imperative for us to … transform the American tax administration system into one that is modern, one that is capable of adapting to this digital age, and one that is evolving to meet the needs of the taxpayers of our great nation.”
The IRS boasted several achievements made in the last year, especially during the tax filing season compared to years prior. According to Werfel, this year’s tax season was “one of the best” “in years,” marking “two years in a row where taxpayers have seen dramatically improved service” compared with “the pandemic years.”
Some wins the IRS says it scored include:
- Hiring “thousands of new customer support representatives,” who helped answer one million more phone calls than last tax season with an average wait time of three minutes, down from 28 minutes in 2022.
- Expanding online features and tools for taxpayers and professionals, including individual, business, and tax pro accounts.
- Enabling digital correspondence and responses to notices and other communications, which the IRS estimated will reduce up to 125 million paper filings annually
- Simplifying and redesigning 31 notices
- Launching a pilot program for Direct File, a prototypical, cost-free e-filing alternative
- Creating an online portal for various clean energy credits
- Establishing targeted enforcement campaigns involving noncompliant millionaires, partnerships, and executives using business aircraft for personal purposes
- Cracking down on scams, fraud, and promotors; for example, a moratorium pausing an influx of questionable Employee Retention Credit claims.
“We are making a difference to taxpayers and the nation, and the improvements at the IRS are just beginning,” said Werfel.
What’s next?
The IRS warned that if current funding levels are not sustained, its “level-of-service” metric will drop from an expected 85% in fiscal 2025 to under 30% the following year. If its funding needs are met, the IRS aims to, from now through next year, continue to enhance the taxpayer experience. Specifically, this will entail improved live assistance features online and in person. Callback functionality, voice and chat bots capable of handling a broader range of tasks, and better-staffed Taxpayer Assistance Centers are some examples outlined in the supplement.
Overall, the IRS wants to eventually move as many tax forms, non-tax forms, and notices to electronic formats. A 2025 priority is scanning 99.9% of paper returns at the point of receipt and phasing out archaic processing equipment. Online accounts will also see new features added in over time allowing taxpayers and practitioners better access to information, records, and assistance.
Audit rates on large corporations with over $250 million in assets will “nearly triple” in tax year 2026 compared to tax year 2019 (22.6% from 8.8%), Werfel said. For large, complex partnerships with assets over $10 million, audits will increase “tenfold,” from 0.1% in 2019 to 1% in 2026. Individuals with incomes over $10 million will see a 50% more scrutiny, up to 16.5% in 2026 from 11% coverage in 2019, the commissioner announced.
At the same time, Werfel said the IRS is committed to eliminating audit selection discrepancies among different demographics, citing a study by a team of researchers at Stanford Study published February 2023 that found that Black taxpayers are audited up to nearly five times as much as others. Inflation Reduction Act resources will be used to better identify and prevent future disparities across race, ethnicity, age, gender, and location.
“We have to make sure that we are continuously monitoring for such disparities, not just amongst Black taxpayers, but other minorities and any other inequities that would degrade trust in in our tax system,” said Werfel.
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