By: Dan Massey, CPA, Principal, Walz Group CPA
Whenever a new tax-related law is passed, business owners are naturally inquisitive as to the impact it will have on their enterprise. The recently signed Inflation Reduction Act has a handful of tax provisions, but the aspect that is generating the most attention is the increase to the staffing and budget of the Internal Revenue Service (IRS).
The bill, which was enacted on August 16 of this year, allocates $80 billion dollars to the IRS over the next 10 years, an average of $8 billion annually. The budget of the IRS, presently about $14 billion, dropped 22 percent (in today’s dollars) from 2010 to 2021.
In 1991, the IRS had one employee for every 2,217 U.S. residents. Last year, they had one employee for every 4,219 U.S. residents. The stated goal of hiring 87,000 agents to an existing workforce of 80,000 would ideally rectify this shortfall, but over half of the present IRS workforce will be eligible for retirement within five years, so total staffing may only increase by about 50 percent.
Impact on Taxpayers
Much of what the IRS does relates to taxpayer service and operations. As of July 1, the IRS anticipated 13.4 million unprocessed paper-filed returns through the end of the year. Weekly, the Service is only processing about 300,000 paper returns, meaning that it will take 45 weeks at the current pace to get through the entire projected backlog. Additionally, during filing season, approximately 1 in 10 phone calls are answered. Increasing staffing at the IRS would help returns to be more quickly processed, phone calls to be more readily answered, and tax notice responses to be more easily addressed.
What About an Audit?
For this law to have been passed, there needed to be an income element to it, and the largest revenue generation in the law is the closing of the so-called tax gap, the difference between what taxpayers actually pay in tax and what they should pay in tax. The way to close this gap, estimated at $600 to $700 billion over 10 years, is to increase the enforcement arm of the Service.
For comparison’s sake, in 2010, the audit rate of a taxpayer earning less than $1,000,000 was slightly less than 1 percent (0.87%). The audit rate of taxpayers earning over $1,000,000 in 2010 was 9 percent. In 2019, those figures became one-quarter of one percent and 1.16 percent, respectively. If audit rates going forward are tripled compared to 2019, they still would fall short of where they were in 2010, and that level of increase is not likely because the funding breakdown has a 70% increase allocated to enforcement.
The IRS is woefully behind in myriad areas, including technological systems. The Act has an opportunity to address these issues, but it also will come with greater likelihood of audit, especially for those taxpayers taking overly aggressive tax positions.
Dan Massey is Principal in Charge of Walz Group CPA’s Assurance Division. He performs audit services for clients in many industries, focusing on construction, entertainment production, and not-for-profit entities. Dan is a member of the American Institute of Certified Public Accountants (AICPA) and the Pennsylvania Institute of Certified Public Accountants (PICPA). He is also chairman of the C.O.R.E. Task Force for the Keystone Chapter of Associated Builders and Contractors. Connect with Dan on LinkedIn or contact our office to get in touch.
Sources: US Government Accountability Office (May 2022); New York Times (“Republican opposition to I.R.S. funding is rooted in broader political goals”, August 26, 2022); Kiplinger (“ Is an Army of New IRS Agents Coming for Your Tax Dollars?”, August 29, 2022); American Institute of CPAs (Town Hall, August 25, 2022); Tax Policy Center (July 4, 2022); National Payer Advocate (“NTA Blog: IRS Deputy Commissioners Respond to Taxpayer Advocate Directive on Scanning Technology; National Taxpayer Advocate Appeals Decision to IRS Commissioner”, August 4, 2022)
Posted October 6, 2022