The Inflation Reduction Act (H.R. 5376) earmarked $80B for the IRS over the next 10 years. While the right and left wings of the US government will undoubtedly argue about the extremes of what this influx of money can do, tax preparers need to understand what this means for our clients; both individual and corporate taxpayers.
Let start with appropriations:
| activity | amount |
| Enforcement | $45.6 billion |
| Operations Support | $25.3 billion |
| Taxpayer Services | $3.2 billion |
| Business System Modernization | $4.8 billion |
Note: The Department of Treasury will receive $557.5 million to oversee and administer the new IRS funds: $403 million to TIGTA, $104.5 to the Office of Tax Policy, and $50 million to the Treasury Departmental Offices.
So, the largest tax collections agency in the world just received a crap ton of money. What does this mean for the American taxpayer? One thing is for sure, it means an uptick in hiring at the IRS. Several experts and former agents have chimed in about where this money is going and weaponizing the IRS is highly unlikely.
The pandemic affected nearly every business and everyone in the world, and the IRS was no different. There are an estimated 8 million unprocessed returns in 2021. And, anyone who has attempted to call the IRS knows that calls are going unanswered. It is estimated that the IRS answered 11% of all calls in 2021. These are staggering numbers for an agency that's in the center of Federal government funding.
An actual audit for your clients is very rare. From 2010 to 2019, the rate of individual audits dropped from 0.9% to 0.25%. To put it into numbers, that's 25 audits out of every 100,000 people. However, with the bulk of the money going to Enforcement, there is no doubt that audits will increase. However, these audits are less likely to focus on American households earning less than $400K annually. There will be a focus on businesses and corporations who are being asked to "pay their fair share" into the tax season. As we all can imagine, taking on corporations will require a ton of research, analysis, and legal work.
Anyone who has worked for the Federal government knows that the computers, software, and infrastructure are outdated. And, this becomes very obvious if you've ever been to the IRS website 👀. Unfortunately, the Federal government cannot afford to be on the cutting edge of technology; however, they still need a makeover. Increases in computer processing speed, low-cost data storage, protection from cyberattacks, and mobile friendliness will most likely all be on the table.
There's an entire marketplace of money being exchanged that the IRS has little to no control over. Some people have made millions in cryptocurrency, and increasingly start-ups are using CashApp, Venmo, PayPal, and Zelle as their primary merchant services providers. Many of us remember when that single cryptocurrency yes/no question showed up on tax forms...seemed simple enough. But, providing a dishonest response to this question can have a big impact. Regarding peer-to-peer networks, they are now required to send users a form 1099-K if more than $600 was exchanged. All of my "sou-sou" (sorry, savings club) champions and small business owners with loose accounting practices are now required to classify these exchanges of funds properly.
There is no doubt that $80 billion dollars will change the landscape of the IRS and income taxes. But, let's not forget that this is over a 10-year period, so the impact will be minimal to start. However, there is no better time for us all to get our "financial house" in order than now while the IRS is in ramp-up mode.