Historically, there have been multiple initiatives to improve Internal Revenue Service (IRS) operations and interactions with taxpayers. However, with the passing of the Inflation Reduction Act of 2022 (IRA 22), the IRS will now receive increased funding to improve modernization and enforcement.
Over the next 10 years, the IRS will receive nearly $80 billion intended to close the “tax gap”—a measure to “shore up” the difference between what should be collected by the IRS and what is actually being collected. By closing the nearly $600 billion tax gap, the IRS’s revenue is projected to increase by $204 billion over the next 10 years. The bill breaks down the way these funds will be appropriated to the IRS.
The IRS will receive $45.6 billion—comprising a majority of the total funding allocated to the IRS from IRA 22 funding—for increased enforcement of tax laws. These funds have been appropriated for covering expenses in determining and collecting owed taxes; providing legal and litigation support; conducting criminal investigations; and monitoring highly scrutinized compliance areas such as virtual currencies, syndicated conservation easements, and micro-captives. The funding is also allocated for carrying out related compliance activities and enforcing criminal statute violations and other financial crimes pursuant to internal revenue laws.
It is still uncertain exactly how the funds will be used to increase enforcement. It is likely the IRS will employ additional audit agents and provide training and education for all IRS agents. Regardless, the IRS aims to improve enforcement of federal tax compliance to increase revenue by increasing collections.
IRA 22 provides $25.3 billion for IRS operational expenses. These expenses cover routine costs such as rent payments, facility services, postage, security, research, telecommunications, maintenance, and information technology development.
IRA 22 allocates $3.2 billion toward taxpayer services, including prefiling assistance and education, filing and account inquiries, and taxpayer advocacy services. This is an area in which both taxpayers and tax practitioners will certainly appreciate seeing improvements. During the COVID-19 pandemic, the IRS became quite backlogged with delays in processing returns and issuing refunds. Significant telecommunications challenges additionally caused a great deal of frustration for taxpayers. During the 2022 tax filing season, only 1 out of every 10 calls was answered, and even before that, taxpayers could expect lengthy “hold times” for phone calls placed to the IRS. Increased funding for taxpayer services will ideally combat the significant backlog the IRS is under and provide for increased lines of communication between taxpayers and the IRS.
Lastly, $4.8 billion will be used to modernize IRS business systems and upgrade related in-house technologies. This modernization includes the development of callback technologies that will also aid in improving lines of communication between taxpayers and the IRS.
Both taxpayers and the IRS have faced recent challenges, many resulting from the pandemic. However, IRA 22 provides funding to help resolve these challenges and alleviate the strain on businesses, individuals, and the IRS.
If you would like to speak with a PYA tax professional about any aspect of the Inflation Reduction Act of 2022, or need guidance related to this or any business advisory or tax planning and strategy matter, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.