Bill Smith, national director of tax technical services at the National Tax Office of Top 10 Firm CBIZ MHM, discusses what the new funding for the Internal Revenue Service in the Inflation Reduction Act means in terms of enforcement and greater audit activity, as well as how it will impact tax professionals.
Transcription:
Dan Hood (
Welcome to On the Air With Accounting Today. I'm editor-in-chief Dan Hood. There's been a lot of talk recently about the roughly $80 billion in extra funding for the IRS that was included in the Inflation Reduction Act. And not all of that talk has been, should we say, useful or well informed. Here to help us unpack that $80 billion, and what it means for taxpayers and tax pros, is Bill Smith. He's the national director of tax technical services at the National Tax Office of Top 10 Firm CBIZ MHM. Bill, thanks for joining
Bill Smith (
Dan, it's a pleasure to be here. Thanks for inviting me.
Dan Hood (
Yeah, it's a great topic too, because like I said, there's been a lot of talk about this and some confusion and misinformation spread around. So first off, I think my first question is, should the average taxpayer be expecting armed auditors at their doorstep anytime soon?
Bill Smith (
That's a hard no. <laugh> <laugh>, just for example, the only people within the IRS authorized to carry a firearm are in the criminal investigation division and they make up less than 3% of the IRS. Right. And if the criminal investigation division comes to your door, you've got bigger problems than their firearm, I can assure you. <laugh>.
Dan Hood (
All right, I'm glad the that's right there. We've already gotten huge value out of this because now people can relax and unbar their doors and not be too concerned about that. But there is some money in this for enforcement. There is some expectation that there will be some extra auditing going on and so on. How much of this 80 billion is going for enforcement?
Bill Smith (
Well the short answer to that one is we don't know yet. Congress wanted about 45 billion of it to go to enforcement. But that's just their wish, so to speak. So Secretary Yellen said she would like the iOS to come up with the proposal of how it's gonna spend the money within six months. But we have the term for Commissioner Redig expiring on November 12th. And in my opinion, there will be a new commissioner and there's no reason for Commissioner Redig to put the plan together. He might put some suggestions together, but it's really gonna be on the new commissioner to make a proposal on how he or she thinks that money should be spent. So we have Congress saying, We'd like you to spend 45 billion right on enforcement. It's up to the IRS on how they're going to spend it. But keep in mind that this is 80 billion over 10 years.
(
Hey, that's the first thing to remember. You're only talking about not only 8 billion a year. That's almost as much as I make <laugh>, but <laugh>, it's gonna be a slow ramp up. So we know for Middle America, both the secretary and the commissioner have said there's not gonna be any increase in audit rates over recent years and for income up to 400,000 thousand dollars, which is a very large chunk of middle America and below. So bear in mind that even though it will ramp up in certain other areas for higher income taxpayers and they want to, for instance, increase audits of partnerships because pass through entities represent such a large percentage of American business and their audits of partnerships and particularly large partnerships, which are the equivalent now of large corporations, still very low. And bear in mind again, that when you're talking about audit rates for your average mom and pop, they're just absolutely almost nonexistent, right?
(
It's below 1% and that's going to not change dramatically. If they increase it by a full 1%, you're still below 2% and that would be doubling it plus some. So I don't think average American families have to worry about increased IRS audits, the higher income individuals, the partnerships, the other places they're targeting like employer retention, tax credit claims. It's still gonna take them a while to hire people and to train them and to get them up to a level of competency to start doing audits and doing them correctly. So I don't see any change for 23, maybe 24 at all. And then as they start to hire, if they can hire, because they're also gonna be experiencing the same problems with hiring that American business is plus the negative connotation of working for the irs, right? The increase in threats on IRS employees makes it a less attractive place to work. But assuming they can hire, they've gotta train and they've gotta get their people up to speed.
Dan Hood (
And then as you say, it'll be still be aimed at large taxpayers partnerships, larger businesses, that sort of thing. Cause that's as Willie Sutton used to say, right? That's where the money is and right, the goal, there's a couple of things worth, I think just for level setting you talked about 8 billion a year. The IRS budget is something between 10 and 12 billion.
Bill Smith (
I think it's at about 13 now. 13, I'm not mistaken. So yes, it's a nice bump up if you go from 13 to 21, let's say. But bear in mind that from 2010 to 2019, the IRS lost 22% of its employees and almost 20% of its budget. So you also have some astronomically high percentage of IRS employees who are eligible for retirement. They haven't retired yet, but they have the eligibility. So much of the hiring is going to get them back to 2010 levels as opposed to the army of armed agents battering your door down you see on TV shows,
Dan Hood (
Right? And as you say, those people need to be trained, right? Because a lot of those people they lost were some of their most experienced people. They had the expertise in the large company or large partnership or large taxpayer audits. And that's one thing we hear is that they're lost a lot of that skillset from just attrition.
Bill Smith (
Absolutely. If you think about the attrition from retirement, those almost by definition are your most experienced people. If you hire somebody out of college, let's say, and you bring them in to replace someone who's had 35 years of audit experience and large corporation world, you better hope that you're moving people up and that new person is coming in at the bottom of the ladder, not stepping in for the person who retired. Again. The other part of it is not all of the first of 87,000 number was just a projection in a 2021 report by treasury of what the iris might be able to do with the $80 billion. There hasn't been any decision to hire 87,000 employees. They're gonna hire as quickly as they can because even if they were hiring 87,000, again, you have to assume that's over 10 years because they can't spend all 80 billion in year one putting new staff in place. And much of the new staff is not gonna be in enforcement. If you use congressional numbers, let's say half of it's enforcement and half of it goes into other aspects of the irs, either operations or it, right, or customer service. God forbid we should start getting some customer service from the IRS <laugh> and not get our courtesy disconnects on our telephone call <laugh>.
Dan Hood (
They could hire one or two more people to answer the phones as opposed to the two people who seem to be doing it now.
Bill Smith (
That's right. And they're doing a heck of a job
Dan Hood (
<laugh>. Well, I mean we can stick with enforcement cuz there's a ton there. But I do wanna talk a little bit about some of the rest of the money and where it's going. Cause you mentioned you touched on some of those areas, customer service, What's the rest of the spend looking like?
Bill Smith (
Well, those are three of the biggest areas. You've got processes, but first of all, you've gotta process all of the unprocessed returns that have been causing this big backlog. As I've said before, anything that gets paper filed is just tossed into a basket of, we'll think about you at some point in the future, right? God bless 'em. A lot of things to do with the payments that had to go out that we're sending out all the payments and like we irs, can you do this by next week sort of thing. So they had to redirect all IT personnel to figure out how to do that. They've had a lot of burden on them in addition to running the tax system over the term of covid, so to speak. So they've gotta get those people focused, hire new people in IT processes and in customer service. Now, Congress only allocated about 3.2 billion I think for customer service. Like to see that number go up when they finally decide how to spend, because 3.2 million billion, sorry, over 10 years isn't a big bump up in terms of customer service. But if you think about if they improve their IT and they improve processes and operations, that also beneficially impacts customer service, right? So I think they're limiting customer service to answering the file.
Dan Hood (
And again, that the timeline for this, forget for all these things, as you say, it's over 10 years. So, or should we expecting similar lags in terms of you've gotta get these things up and running and they've gotta do studies before they can launch new IT or new customer service initiatives and then they've gotta hire people to staff them. So are we looking at a similar of term delay or not delays? Yes. Long term implementation
Bill Smith (
Ramp up implementation. Yes, we are. And you can imagine among other things, the level of security that the IRS is gonna have if it changes any sorts of IT systems. And so there's going to have to be not only top of the line security, but infinite amounts of testing to make sure they're protecting taxpayer information. But the number of magnitudes of bogus returns that are being filed now, it's imperative that they upgrade their IT and their security.
Dan Hood (
All right. Excellent. All right. There's a lot more to talk about this, but we're gonna take a quick break. All right. And we're back with Bill Smith of CBIZ MHM talking about that $80 billion of armed response. It turns out not coming to your door, you don't need to worry about that. But there is a lot of other there's a lot of money going to be spent at the IRS over the next 10 years on a bunch of different areas. Enforcement's obviously a huge priority. We talked a little bit or Bill talked a little bit about some of the other areas where it's gonna be spent. But I wanna turn to take it a slight turn on our focus on it and look at how it's gonna affect tax professionals and tax preparers and tax practitioners. How is this gonna impact them? Should they be expecting improvements in areas? Should they be expecting more scrutiny or what should they be looking for from this 80 billion?
Bill Smith (
Well, I guess because it's going to affect enforcement primarily at the larger end of the spectrum, high income, high net worth individuals larger businesses, all of that group is going to be using tax professionals, CPAs, tax lawyers, et cetera. So it, it's going to be a benefit to the professionals if their clients start getting into more extensive audits because they're gonna need representation, right? You're gonna need your cpa, you're gonna need your tax attorney to go in there and represent you. The numbers will be large. So it'll merit the spend on professionals, which we all know is expensive. But if you're talking about a 25 million or adjustment or a, God knows when they get into transfer pricing, the numbers go through the roof, that sort of thing, it's gonna be no tax professional likes a return that he or she is prepared, gets selected for audit.
(
I can assure you of that. But as someone who has done a lot of controversy work with the irs, I can tell you that it's a good opportunity for charging clients because they need you and you didn't select their return for audit, You didn't do anything to cause them to be audited. So in that respect, I think it'll be kind of a boon to tax professionals when you get into, again, the mom and pop level of client, as we said, that's probably not gonna have any big change because there's not gonna be any change in the level of audit, the level of scrutiny, that sort of thing. And we presume every tax professional is trying his or her best to prepare a complete and accurate return for their clients. And that being said, it should, I think the IRS benefits generally from tax professionals preparing returns because the vast majority of them are professional and ethical about what they're doing.
(
So you get a much higher level of correctness in returns if they're prepared professionally. So again, how's it gonna affect professionals, just the enforcement end? I think it's not gonna change the way CPAs and accounting firms prepare the returns that are more likely to get audited. I don't think they've been preparing them in a way that's sloppy because they think they are not gonna get audited. I think they try to do it correctly. So it'll just be, if you get selected for audit now because they are using different metrics to select returns or they have the manpower to do it right, then they're gonna need representation. Representation.
Dan Hood (
Well, I've definitely seen heard, at least from a couple of D firms, and this is purely anecdotal, that they're looking more at tax controversy practices looking to ramp those up or to get more exposure expertise in them because they, they're looking, hey, yeah, nice to say audit rates may go up even if it's from a very low base. And it's worth pointing out that base really was insanely low or every time I saw those stats about how low your chances were of getting audited unless you were getting the E I T C stunning that how small the chances of getting an audit were mean given how much people fear being audited, your chances of being for most taxpayers being audited were almost none.
Bill Smith (
I agree a hundred percent. As I mentioned before, as I've said elsewhere, infinitesimally small and I said if they double the amount of audits on the 400,000 and under group, you're going to under 2% right now. So it's low. Obviously the more higher your income even now, the greater your chances of being audited. But again, it's by and large a manpower issue within the irs, right? Because they can use their metrics to select returns, but if they don't have anybody to conduct the audit or they don't have anybody with sufficient expertise to conduct the audit, then they don't audit. Pretty simple. So it will, again, ramping up controversy for professional firms, comp controversy, expertise. I don't think that's a bad idea because we're going to see over the next five years, probably not over the next two years, the start of the incline of increased audits. And those people, once again, are gonna need representation, are gonna need expertise and how to deal with the irs, or bear in mind states are also ramping up. So that's another area where a controversy expertise is gonna help clients.
Dan Hood (
Gotcha. All right. Now, so you had mentioned earlier the famous courtesy disconnect. We know the IRS has been having terrible problems with getting back to tax practitioners practitioner service line has not been open door passport to response that we'd hoped it might be. Can they hope for any improvement on that front in terms of responsiveness?
Bill Smith (
Well, they really have to because that's the public relations face that they're projecting right to the world, so to speak. And I think they had over a hundred million calls in, I think 2021. I think they have those statistics if I've got the year right over a hundred 0.5 million calls and they answered less than 30% of them, I'm sure. So I mean, that's a lot of calls that takes a lot of people to, you know, divide the number of hours a day into that. And it requires a lot of people to answer. But if the system is complicated and complex enough that a hundred and 0.5 million people are calling you to ask how to do things correctly, and that's generally what the calls are about, What do I do? How do I do this? Who do I talk to? You wanna provide that service. So A, you're getting better results in the returns that are being filed or in your collection activities, and B, you're projecting a better face to the public to show that, as I always like to say service is their last name,
Dan Hood (
<laugh>. I never That's good. That's great. You might let them know that, right? Cuz they have Yeah,
Dan Hood (
<laugh>. And to be fair, you know, had brought this up and I always think it's worth reinforcing as much as everyone likes to punch around the, the irs they were got enormous new mandates over the course of the pandemic. You say all the different pay payments that they got sent out, the child tax credit that they sent out every month for six months of last year, all kinds of things, all kinds of programs that they managed and managed fairly well. I mean that money got out, it got out big doubt in the time that it was supposed to get out. People got the relief that the legislation wanted them to have, et cetera, et cetera. So it's always worth pointing out that it's like if someone came along and gave you two extra jobs on top of your regular job, it wouldn't be surprising if you didn't do your first job quite as well as might hope you did. So
Bill Smith (
That's a perfect metaphor. Perfect metaphor.
Dan Hood (
I always like to throw that out just to give as much credit as we can.
Bill Smith (
And I agree. And they had to pivot on a dime, so to speak and I think they did a great job at it. And of course they're already down budget, they're already down employees yet they still did it. And of course that's going to affect customer service certainly on the tax administration side. So they have been over a barrel for quite some time and I'm a big advocate of them getting funding very much so. Even though it will drive up audit rates for the class and the people and the entities that we talked about those people are having their returns prepared professionally. And audits can be expensive. I understand. And you don't always get an agent who understands the nuances of the positions that you've taken, but the price of a free society <laugh>. Yeah,
Dan Hood (
Yeah, exactly. Well, and this is what's sort of foregrounding, cuz you've mentioned it a couple times, but it is interesting how no, certainly no one I've talked to or no one I ever heard of has been saying, Hey listen, audit rates are unbelievably low. You don't need to care about how careful you are with the tax return. I mean obviously there's always frauds and scammers and that sort of thing, but generally speaking, tax prepares and tax professionals are like, Yeah, no, we prepare it. Right? You just do it right. Doesn't matter if there's no one's looking, go ahead and do it. Right. So there's not for a lot of those people, there's the pain and agony of going through your audit. Yes, it's uncomfortable and yes, as you say, you might get an agent who's not quite up to speed, but you shouldn't have much to fear if cuz most tax preparers are doing it. Right.
Bill Smith (
And honestly, from anecdotally what I see when we go in with an audit of a larger client, the adjustments are fairly inconsequential compared to the magnitude of income and the complexity of the return that you're talking about. And the clients are never particularly upset about the result from the irs, right? So it's a system, it's kind of evidence of a system at that level that's working pretty well.
Dan Hood (
Excellent. All right. Well we've covered a lot of ground. There is one other thing I wanted to bring up that's in the bill, and it's a relatively small, in terms of the money we're talking about. I think it's a relatively small amount of money. It's in the millions, not the billions, but at some point the bill asks for a report on what it would look like for the IRS to develop a free direct eFiling system essentially to prepare to create a system that could do e-file within the IRS as opposed to relying on what they've been relying on as sort of software vendors to provide free filing to lower income taxpayers. And the IRA wants the IRS to look into what this would look like. Do you have any thoughts about what that might mean and for tax professionals particularly?
Bill Smith (
Well, I think it would be great for taxpayers, first of all, that you really shouldn't have to pay to file your tax return. They're already paying your taxes. This is just another tax on top of your tax <laugh>, right? But for tax professionals I kind of put them into two groups. There are companies that the vast majority of their clientele are in the, we'll call it under $400,000 since that's the number we've been using. But even much lower than that, preparing tax returns, they might be impacted by it, but even that group I don't think will be heavily impacted by it because people come to them because they are afraid of making a mistake on a return, they don't wanna hassle with it, whatever their excuse is. They don't even wanna use one of the electronic systems that's available now, the software that you can purchase.
(
They just want to take their stuff to somebody in an office and say, Can you please prepare my tax return? And they're willing to pay the charge, which is not that high. So I don't think a free file system is gonna affect the tax professionals who have that clientele as much as it might the software vendors who are doing the tax return preparation with the people who said, If I had that same type of system free on the IRS site, why wouldn't I just use the IRS site? Right? If it's really the same, ask me a question, I'll give you the answer, and at the end of the day, you spit out a tax return and tell me how big my refund is, hopefully,
Dan Hood (
Fingers crossed. Right. Excellent. All right, good to know. I think, like I said, we've covered a lot. We could spend days talking about it, but any final thoughts that you think people should be bearing in mind from the new funding or
Bill Smith (
I think you should be aware of misinformation and disinformation. Hopefully we've cleared a lot of it up today. I don't think of the IRS as the bad guy. I think they need the funding. They need to both get their employee numbers up to where they should be to efficiently run the agency that collects more than 95% of the revenue for the United States of America. You can complain about how Congress spends it, but you probably want them to collect it nonetheless. So,
Dan Hood (
Exactly.
Bill Smith (
Again, I'm glad they got the funding.
Dan Hood (
Excellent. All right, well thank you so much, Bill Smith of CBIZ MHM, thank you very much for joining us.
Bill Smith (
Thank you for having me, Dan.
Dan Hood (
And thank you all for listening. This episode of On the Air was produced by Accounting Today. Rate or review us on your favorite podcast platform and see the rest of our content on accounting today.com. Thanks again to our guest, and thank you for listening.