The Inflation Reduction Act of 2022 was passed by the Senate on Aug. 7, 2022, and is expected to be passed by the House this week and signed by President Joe Biden next week. The bill provides long-awaited funding of $80 billion to the IRS over the next 10 years to enhance taxpayer service, operations, business system modernization and enforcement.
Some say only two things are certain, death and taxes. Another adage that applies today: Few things move quickly in the government and fewer bills are proposed to raise the revenue to support their own expenditures. At a time when inflation has hit the ceiling, the Democratic Senators proposed and passed (with the vote of the Vice President) the Inflation Reduction Act of 2022, legislation that would help increase and expedite processes at the IRS to assist in funding the bill itself.
Over half of the $80 billion in funding will be allocated to enforcement, including examination, collection and litigation. The balance will also support taxpayer services, IRS operations support and business systems modernization. It is estimated that $124 billion in tax revenue will be raised as a result of enhanced enforcement efforts and other service enhancements that support voluntary compliance. Another portion of the bill creates a task force to design an IRS-run free, direct efile tax return system.
It is important to walk through some of the key provisions of the IRS proposed budget of the bill to get a sense of the benefits and burdens.
Increased funding for taxpayer services
The Inflation Reduction Act of 2022 allocates approximately $3.2 billion for taxpayer services. Taxpayer services include pre-filing assistance and education, filing and account services and taxpayer advocacy services.
Taxpayers have had difficulty receiving quick and efficient service from the IRS. The bill proposes that the IRS make it easier for taxpayers to get the help they need and access to tax filing information. The taxpayer advocate, who has the ability to expedite resolution of unique taxpayer problems with the IRS and address systemic IRS issues, will have an increased ability to handle cases. Taxpayer issues that have been backlogged may be resolved faster with the proposed increased funding.
Increased funding for enforcement
The bill allocates approximately $45.6 billion for enforcement. Enforcement includes, among other things, the IRS’s ability to determine and collect taxes, provide legal and litigation and support, conduct criminal investigations, provide digital asset monitoring and enforce criminal statutes.
The Bill provides a benefit to some and a burden to others. Funding for legal and litigation support may make the ability to negotiate settlements with the IRS more readily available; however, it also gives the IRS attorneys more support to litigate.
The initial budget portion of the bill noted that IRS funding is not intended to raise taxes on any taxpayer or small business with taxable income below $400,000 or those who are not in the top 1 percent. During the review of the bill under the Byrd rule, Republicans raised a budget point of order, and this “limitation” language was removed. With the removal of this “intention” language, the IRS will be free to examine taxpayers regardless of income level, under their normal process. So, it is now more important than ever for taxpayers to work closely with their tax advisors to ensure that they have the support and documentation they need to successfully manage any IRS examination of their returns.
Taxpayers who hold digital assets including digital currency, may begin to see more correspondence from the IRS as it focuses on digital asset monitoring and compliance.
Increased funding for operations
The Bill allocates approximately $23.5 billion for operations support. Funding departments within the agency including IT development, telecommunications, facilities services and printing and postage will provide the IRS the ability to increase taxpayer services and enforcement.
With the largest appropriations of funds, the IRS has ever received, new equipment and new software should help make the resolution of taxpayer issues easier. While the IRS will be able to disseminate more informational materials this also makes it easier to send more automated notices of assessments and other audit requests.
Increased funding for business systems modernization
The Bill allocates approximately $4.7 billion for business systems modernization. Business systems modernization includes the development of call-back technology and other technology to provide a more personalized customer service. The bill language suggests that the funding will not be used for operation and maintenance of legacy systems.
No one wants to wait on hold while listening to fully synthesized melodic music. Even reading about hold music can send shivers down the spine of the most stoic. Perhaps however, it is music to the ears of nearly all taxpayers (and certainly your favorite tax practitioners) that call-back technology will be implemented. This feature will provide more of a concierge system for the taxpayer and improve customer service. The hope is that this increased funding will enable the IRS to be more responsive to taxpayer inquiries and assistance requests and that customer service will be improved significantly even with high call volume.
Proposal to fund and implement a free e-File system
The bill proposes the creation of a task force to design an IRS-run free “direct file” tax return system. The bill sets the expectation that the IRS will, within nine months from the date of enactment, deliver a report to Congress on the cost of developing and running a free direct efile tax return system with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data. The report must also capture taxpayer opinions, expectations and level of trust based on surveys for such a free direct e-file system as well as the opinions of an independent third party on feasibility, approach, schedule, cost, organization design and IRS capacity to deliver such a tax return system.
This Bill gives the IRS only nine months to provide guidance on developing and running free direct e-file software. Free direct e-file software is a benefit that may ease the cost and burden of filing a tax return and increase compliance for some. This initiative is aimed at taxpayers with simple returns. Taxpayers with complex returns will likely continue to need the guidance of tax professionals.
The increase in IRS funding will enable the IRS to improve taxpayer service and ease of filing as well as provide for enhanced enforcement. These efforts should improve taxpayer compliance and reduce the annual tax gap.