Last week, the Internal Revenue Service released the Strategic Operating Plan, which broadly lays out the agency's plans to use $80 billion in funding from the Inflation Reduction Act to transform the administration of the tax system and services provided to taxpayers, while modernizing its dated technology infrastructure and significantly strengthening enforcement to close the so-called "tax gap" (the difference between taxes reported and paid on time and those that are not).
According to IRS estimates, taxpayers — individuals and businesses — collectively pay about 85% of the total taxes they owe. The IRS estimated the tax gap to be $496 billion per year for tax years 2014-2016, the latest period in which it was measured. Many, including former commissioner Chuck Rettig, believe that number is much higher.
The agency's overarching goal outlined in the SOP is to "provide taxpayers with world-class customer service" and reduce the deficit by "hundreds of billions by pursuing tax evasion by wealthy individuals, big corporations, and complex partnerships," said Deputy Secretary of the Treasury Wally Adeyemo.
The Strategic Operating Plan is organized around five key objectives:
- To dramatically improve taxpayer service and help taxpayers receive the tax incentives for which they are eligible;
- To quickly resolve taxpayer issues;
- To expand enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap;
- To use cutting-edge technology, data, and analytics to operate more effectively; and
- To attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
With long-term funding in place, the IRS has hired more than 5,000 phone assisters, increased walk-in service availability and added new digital tools, according to recently installed IRS Commissioner Daniel Werfel. In the SOP, the agency provides a three-year (fiscal years 2022-2024) spending plan that includes $8.7 billion, broken down as follows:
- $3.5 billion for operations support;
- $1.78 billion for enforcement; and,
- $1.7 billion each (19%) for business systems modernization and taxpayer services.
According to Werfel. "In the first five years of the 10-year plan, taxpayers will be able to securely file documents and respond to notices online." Taxpayers will also be able to securely access and download account data and account history. "For the first time, the IRS will help taxpayers identify potential mistakes before filing, quickly fix errors that could delay their refunds, and more easily claim credits and deductions they may be eligible for," he said.
The SOP also includes targeted efforts to ensure fair tax law enforcement and compliance with existing laws. It says the IRS will focus on "areas where compliance has eroded the most," specifically compliance issues involving "wealthy individuals, complex partnerships and large corporations," said Werfel. The IRS will increase hiring efforts for experienced accountants and attorneys to ensure enforcement "at the top." Werfel further noted that the IRS does not intend to increase the audit rate for small businesses or households making less than $400,000.
In addition, the SOP states the IRS will use IRA funding to modernize the agency's technology infrastructure to protect taxpayer data. In the first five years of the 10-year plan, the IRS aims to eliminate paper backlogs that have delayed taxpayer refunds by digitizing forms and returns when they are received and transitioning to fully digital correspondence processes.
"This plan is only the beginning of our work," Werfel said. "This is a unique opportunity for the IRS and the nation, and we will continue to work closely with our partners as this effort moves forward. This investment in the IRS is already helping taxpayers this tax season, and this plan shows that historic changes are coming."
Despite all of this, the SOP provides little detail in terms of spending IRA funds, particularly beyond the next three years, resulting in criticism from some.
Funding declined, workload increased
During the last several years, the IRS has faced continual reduced funding, significant employee losses, several rounds of complex COVID-related legislation, and been tasked with a number of pandemic-related activities including sending out several rounds of relief payments to taxpayers.
Werfel states, "IRS funding has steadily declined over the last decade causing suboptimal staffing and investment. In 2010, for example, we operated with 95,370 full-time employees to meet the demands of the U.S. population (310 million). Today, the IRS is almost 20% smaller (80,006 FTE as of the end of FY 2022), whereas the U.S. population has increased by over 7% (334 million) and the tax law has grown more complex."
IRS data indicates that its workforce has been declining for decades. The number of FTEs at the agency was at a high point of 117,000 in 1992. It ended FY 2022 at roughly 80,000. According to several IRS officials, the agency intends to increase its workforce to over 105,000 by the end of FY 2025. That number reflects what is anticipated to be the retirement of over half of its current staffing over the next few years. That is a significant number of new employees that will have to be trained before they are taxpayer-facing ready.
And according to those same officials, hiring during the first three-year period will be weighted toward enforcement, something that will be especially difficult given the nature and experience of individuals who will need to be hired to effectively fill those roles.
Former commissioners weigh in
Three former IRS commissioners and the National Taxpayer Advocate cited below have all come out in favor of significant increases and ongoing consistent funding for the IRS to continue its daily operations, get back to the staffing levels of the early 1990s, transform taxpayer service, modernize the agency's technology, including privacy and cybersecurity, and hire a more diverse and inclusive workforce.
The concern they have is mainly around how the funds have been allocated by Congress, and the speed with which the IRS intends to hire and train staff.
Chuck Rettig, who served as commissioner during the tumultuous pandemic period, told me, "It is important to remember that the IRA funding will be phased in over a 10-year horizon, and Treasury has stated that the overall IRS workforce should grow each year by no more than a 'manageable 15%.' Recruitment and onboarding will remain a challenge to the plan. Initial hiring efforts are likely to be successful, but there will remain significant competition going forward."
Former commissioner Mark Everson, who served from 2003 to 2007, said that hiring at such an accelerated pace will not be easy, particularly for those expected to examine complex returns, in light of the shortage of accountants and the intense competition for that talent in the marketplace.
And former commissioner Fred Goldberg simply said, "This is the only thing in our entire system that every single one of us has to deal with every year. We can't fire them, we can't opt out, we can't hire somebody else — please make it work right."
Both Everson and National Taxpayer Advocate Erin Collins have indicated that IRA IRS funding is skewed too much toward enforcement and audits and not enough toward improving taxpayer service.
Everson
Meanwhile NTA Collins
Audit rates for those earning less than $400,000?
There is substantial difficulty with ensuring no increase in audit rates for individuals and businesses earning less than $400,000. First, current audit rates for those taxpayers are substantially down from pre-pandemic levels. If the intent is to drive audits up to pre-2020 levels, audits of taxpayers earning less than $400,000 will rise.
Former Commissioner Rettig noted, "There has been considerable discussion regarding Treasury's directive for the IRS not to use IRA resources to raise audit rates on small businesses and households making under $400,000 per year, relative to historic levels."
Certainly, the Treasury directive does not require the IRS to fully avoid examinations of these taxpayers. "Historical levels" of examinations from a decade ago are considerably different than during the more recent, resource- and COVID-challenged operations. Data analytics is helpful, but how can the IRS otherwise determine those reporting less than $400,000 do not actually have additional taxable income? The IRS will need to be transparent in providing more detail on how the Treasury directive will impact examinations of small businesses and similar taxpayers.
Further, the last time the tax gap was measured during the period 2014-2016, the largest portion of "failure to report and pay" was found in individual business income. Typically, these are pass-through entities: partnerships, S corporations and LLCs. But it also included sole proprietors who complete a Schedule C on their Form 1040 returns. When measured, these taxpayers made up 30%, or $130 billion, of the tax gap. Many of these businesses reported less than $400,00 in income, as did their "owners."
How can you determine if the businesses or their owners are not hiding income to fall under that $400,000 cap without auditing them? This challenge is exacerbated with the growth of the gig economy, further increasing the number of taxpayers who aren't W-2 employees. Over 90% of those individuals were found to have paid what they owed.
Further headwinds
In addition to concerns raised by former commissioners and others regarding the difficulty in accomplishing the hiring the IRS intends to do over the next several years, the agency faces political challenges.
Republicans in Congress are critical of the SOP and are sure to be scrutinizing IRS spending and activities very closely going forward. Powerful House Ways and Means Chair Jason Smith has repeatedly expressed his displeasure with the $80 billion in IRA funding plan for the IRS. After the SOP was released, he issued the following statement: "If this is a 'plan,' why does it omit how many employees the agency seeks to hire over 10 years, fail to identify target audit rates for taxpayers, and lack specific details about how the money will be spent beyond the next two years?"
Another concern many have is with the inclusion of new data and analytics initiatives the IRS intends to pursue to help ferret out cheaters. The SOP is going to "establish a centralized function for compliance planning and strategy … create a centralized compliance-planning function to set strategic compliance priorities and route select cases for compliance treatments."
Many tax professionals, politicians and others fear this data about businesses and individuals has the potential of being misused. One example given is the recent Stanford University/Treasury study that found Black Americans are close to 5% more likely to be audited than others. (See
Despite all of this, many agree that the IRS needs to be transformed to meet the unique challenges it faces now and in the future to serve its mission and accomplish its objectives of improving services to help taxpayers meet their obligations, reducing the tax gap by enhancing its enforcement capabilities, particularly around wealthy individuals and large businesses, deploying cutting-edge technology, and hiring a highly skilled, diverse workforce.
