Originally included in President Joe Biden’s Build Back Better plan, a proposal to appropriate $80 billion over 10 years to the IRS is back on the table as part of a reconciliation bill recently announced by Senate Democrats.
The BBB, once a $1.7 trillion legislative package, failed to gain enough support in the Senate to advance beyond the House of Representatives. While some provisions were axed or modified to appease the majority party’s more moderate senators, like Sen. Joe Manchin of West Virginia, IRS funding was left intact. The appropriated amounts and their intended purposes are largely untouched in what is now the Inflation Reduction Act of 2022 (IRA 2022; H.R. 5376).
As written, the funds would be available to the IRS through September 30, 2031, across four areas of the agency. First, the IRS would receive nearly $3.2 billion to improve taxpayer services, such as prefiling assistance and education, filing and account services, and taxpayer advocacy services. The BBB would have allocated north of $1.9 billion for the same expenses.
Enforcement-related funds, at $45.6 billion, make up more than half of the total appropriations. That’s up from the nearly $44.9 billion proposed in the BBB. The goal would be to reduce the so-called tax gap by enhancing the IRS’ means of capturing revenue from taxes that may otherwise not have been collected. Further, the funds would cover litigation and criminal investigation expenses.
The third funding category laid out in the Inflation Reduction Act of 2022 is supporting internal IRS operations. This includes rent payments, facilities services, postage, security, research, telecommunications, maintenance, and information technology development, totaling more than $25.3 billion—$2 billion less than the BBB proposal. Finally, $4.75 billion would be given to the IRS for modernizing its business systems. Call-back and other technologies would be explored to “provide a more personalized customer service,” according to the bill’s text. This amount was unchanged from the BBB.
Additionally, the IRS would be directed to submit a report to Congress on the cost for creating and operating a “direct efile” program within nine months of enactment. The program would emphasize “multilingual and mobile-friendly features and safeguards for taxpayer data.” The report would feature taxpayer feedback and third-party analysis of the viability of an electronic filing option offered by the IRS, and not an outside software provider. To kick-start development, the bill would provide $15 million.
Within six months of the enactment date, the IRS commissioner would also need to report to Congress with a plan detailing how the appropriations will be spent over the 10-year period, followed by quarterly updates highlighting progress and any changes. For each day the report or a proceeding update is late, $100,000 would be docked from the funding. The Treasury Inspector General for Tax Administration, the IRS’ watchdog agency, would receive $403 million to carry out its normal operations.
Notably, the enforcement section of the new act states that the funding is also for “digital asset monitoring and compliance activities,” language also present in the November 3, 2021, House-amended version of the BBB. The plan had defined a digital asset as “any digital representation of value which is recorded on a cryptographically secured distributed ledge or any similar technology” specified by the U.S. Treasury Department.
This definition subsequently became law when the Infrastructure Investment and Jobs Act (IIJA; PL 117-58) was enacted November 15, 2021. The Inflation Reduction Actof 2022 makes no other mention of digital assets or cryptocurrency. Presumably, the monitoring and compliance activities identified in the Act would apply to digital assets as defined by the IIJA, which also established that a digital asset broker is anyone who “regularly provides any service effectuating transfers of digital assets on behalf of another person.”
In March, the Biden administration indicated in its fiscal 2023 Green Book of budget priorities that digital assets would be a focal point of future strategies to address noncompliance. Various IRS officials speaking at tax conferences this year have reiterated that the agency is devoting more attention to tax avoidance behaviors involving digital assets that contribute to the tax gap.
The Congressional Budget Office estimated that extending the IRS’ tax enforcement capabilities would raise $124 billion.
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