With the 2022 income-tax filing season mostly in the books, attention turns to the future. Next year’s filing season, and those beyond, could look and feel much different.
Following the passage of the Inflation Reduction Act in 2022, the Internal Revenue Service will receive nearly $80 billion in added funding from now through fiscal year 2031 to catch up with backlogs, hire more employees, implement 21st-century technology, go after increasingly sophisticated tax cheats and, in short, reinvent itself.
The agency released a Strategic Operating Plan in late March. It envisions significant change to improve taxpayer services, quickly resolve problems, use technology to operate more effectively, expand the workforce, improve its culture and collect a lot more money from corporations, partnerships and wealthy individuals.
If some of the proposals come to fruition, taxpayers could:
- Receive real-time help from the IRS to identify potential mistakes and alerts for claiming overlooked deductions, before filing their returns.
- Reach live IRS representatives quickly by phone or easily arrange meetings in local IRS offices.
- Access their personal information more easily from the IRS website, including balances, payments and notices.
- Get real-time updates on return processing, refunds, audits and personal interactions.
- Find it easier to resolve past-due tax bills and arrange payments on balances owed.
- Interact with the IRS with greater confidence that personal information and refund money will be protected.
Those are just a sampling of the more visible changes that taxpayers might see in coming years. It’s a rare opportunity to modernize the IRS and make it more effective and efficient.
More money for a range of initiatives
The vision is to create “world-class customer service where taxpayers can engage with the IRS in a fully digital manner if they choose,” wrote new IRS Commissioner Daniel Werfel in a letter to Treasury Secretary Janet Yellen.
Helpful tools will better enable taxpayers to navigate the complexity of the tax system and interact, if necessary, with a customer-service staff that will be “maintained at the right size and with the right resources and training to always be ready to meet the taxpayer demand for assistance,” he added.
But make no mistake: The lion’s share of the funding, about 60%, will go toward more oversight of taxpayers, including audits. IRS officials vow the focus will be on businesses and individuals earning more than $400,000 a year, as Yellen outlined in a directive last year.
“We will focus … enforcement resources on hiring the accountants, attorneys and data scientists needed to pursue high-income and high-wealth individuals, complex partnerships and large corporations that are not paying the taxes they owe,” Werfel wrote.
Yellen’s directive instructed the IRS not to use the extra allocations to increase audit rates, relative to historic levels, on small businesses or households earning less than $400,000 annually.
Focus on raising tax revenue
A central aim of the Strategic Operating Plan is to shrink the “tax gap,” or the difference between what taxpayers are estimated to owe compared to what the government actually collects.
The IRS in recent years has pursued much less-rigorous enforcement. The audit rate for large corporations, which have complicating issues such as cross-border activities, tumbled from 10.5% in 2011 to 1.7% in 2019, according to numbers cited in the Strategic Operating Plan. So, too, for wealthy individuals. Just 0.7% of taxpayers earning $1 million or more were audited in 2019, down from 7.2% in 2011.
Partnerships are another area of focus, with their own complexities, many tiers of ownership and increasingly large size. The IRS says it needs specialized capabilities and significant resources to audit them. The partnership audit rate was just 0.05% in 2019.
The IRS plan also envisions more focus on other issues tied to high rates of suspected noncompliance, such as those involving cryptocurrencies.
Funding priorities questioned
Despite all of the money flowing its way, the IRS still might not achieve many of its goals. Of that nearly $80 billion, just under 10% is expected to go to improving customer service and resolving taxpayer problems (though another 10% or so will go toward developing a better-trained, more highly skilled IRS workforce).
National Taxpayer Advocate Erin M. Collins, who heads a watchdog service within the IRS, hopes Congress will reallocate some money.
“The most efficient way to improve compliance is by encouraging and helping taxpayers to do the right thing on the front end,” she wrote in an assessment of the Strategic Operating Plan. “That is much cheaper and more effective than trying to audit our way out of the tax gap … on the back end.”
Service provided to taxpayers and practitioners has deteriorated in recent years, Collins said. She and others also have raised concerns that enforcement activities could go beyond what the IRS has laid out, with audits possibly extending to targets below $400,000.
Skepticism notwithstanding, Collins indicated she remains optimistic and hopeful that, five years from now, “tax administration will be transformed and taxpayers, for the first time in memory, will receive the service they deserve.”
Reach the writer at [email protected].
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