I’ve seen social media posts of outrage that the Inflation Reduction Act of 2022 includes a budget allocation of about $80 billion for the Internal Revenue Service, and the announcement by the Internal Revenue Service that it intends to hire about 87,000 workers, including new and replacement hires. (Note these workers will have a variety of duties, not just auditing income tax returns and collecting past-due tax payments.)
I disagree with those posts. This cash infusion into the IRS is long past due and I believe most of us (U.S. taxpayers) will benefit from this investment.
The Internal Revenue Service is the federal government agency we love to hate. IRS agents are portrayed as people to fear in movies and television shows. Nobody likes to pay taxes. They’re certainly inconvenient, and it seems like nobody understands our tax laws. It seems impossible (especially for small business owners!) to comply with them.
When you really think about it, the IRS serves a vital function. Notice its middle name is “revenue”. The IRS is the only federal government agency that collects revenue. The others ones spend. The money for interstate freeways, maintaining national parks, federal education programs, national defense, law enforcement, disaster relief, etc. has to come from somewhere. It comes from taxes and fees received by the IRS.
Note the Congressional Budget Office has projected the $80 billion investment from the Inflation Reduction Act will bring in $203.7 billion in revenue from 2022 to 2031. The additional amounts that we spend for better administration of our tax laws will be more than double paid back by the additional revenue collected from enforcing our existing tax laws.
Judge Oliver Wendell Holmes once said, “Taxes are the price we pay for a civilized society.” If we expect services from our government, we should be willing to pay our share for them.
The IRS does not enact tax laws. It administers them. If you believe a tax law is unfair, write to your representatives in Congress.
Most of the people who work at the IRS aren’t the ogres portrayed in television shows and movies. Your next door neighbor could be an IRS agent. (They don’t tend to brag about it.) They’re just people trying to do the best job they can.
For many years, Congress hasn’t provided the budget needed for the IRS to do its job. Already underfunded, the IRS was especially hard-hit by the pandemic. Since IRS workers had to stay home for many months, nobody was around to open the mail. Paper-filed tax returns have become “kryptonite” (poisonous) to the IRS.
The IRS recently announced it has processed all originally-filed returns that it received in 2021 and that had no (processing) errors, including 2020 e-filed and paper forms. As of July 15, 2022, it had 9.3 million paper-filed 1040 forms waiting for review and processing. (The Kiplinger Tax Letter, July 21, 2022.) Hiring more employees will help them catch up with the backlog.
The IRS’s National Taxpayer Advocate has described the operating problems of the IRS in its 2021 Full Report. (https://www.taxpayeradvocate.irs.gov/reports/2021-annual-report-to-congress/full-report/) In conclusion, the National Taxpayer Advocate said the IRS was seriously underfunded and understaffed.
From 2010 to 2019, the average audit rate for individual income tax returns decreased from 0.9% to 0.2%, or a 72% decline. The number of revenue agents (who audit complex audits) declined about 40% from about 14,000 to about 10,000. From 2011 to 2020, the number of tax examiners (who audit simpler audits) declined about 18% from about 10,000 to about 8,200. (United States Government Accountability Office – Tax Compliance: Trends of IRS Audit Rates and Results for Individual Taxpayers By Income https://www.gao.gov/assets/gao-22-104960.pdf.)
More people are cheating on their income tax returns because nobody is looking! They know they are highly unlikely to be audited. For example, more taxpayers are under-reporting business income.
There are also many tax returns self-prepared using commercial tax return preparation software that are in error and aren’t caught. (For example, some taxpayers don’t apply the rules correctly for deducting home mortgage interest.)
When the audit rate is low, professional tax return preparers don’t get feedback about whether they are correctly applying the tax laws for their clients. They also take liberties when preparing income tax returns, because they know they are highly unlikely to be caught.
The IRS discovered that some unethical tax return preparers intentionally prepared fraudulent refund claims for clients and shut down their businesses. More of them probably haven’t been discovered because of the low audit rate.
Based on information gathered in tax audits, the IRS has found that a surprising number of high-income taxpayers underreport their taxable income. It simply hasn’t had the manpower required to catch more of them.
The IRS has also found that many low-income taxpayers are making errors when claiming the earned income tax credit (EITC), mostly because they claim the credit when they don’t qualify for it. The average audit adjustment for EITCs for 2021 was about $4,955. These are simple audits, so they have a very high return for the time investment required.
When taxpayers underreport their income, Congress passes revenue-raising tax laws so that honest taxpayers make up the difference. In other words, the amount to make up the shortfall comes out of YOUR pocket (and mine, too)!
I recently went through the experience of submitting a paper-filed payroll tax claim for a large Employee Retention Credit for 2020. The claim was filed about April 19, 2021. The IRS sent a refund payment about December 6, 2021 (almost eight months later!). That refund check was lost in the mail, so a request to trace the refund and reissue the check was submitted about January 15, 2022. The refund was reissued during August, 2022 (adding another seven months!). Meanwhile, the taxpayer had to reduce its deduction for wages on its 2020 income tax return and pay additional federal income taxes by April 15, 2021.
I made several telephone calls to the IRS to follow up on these matters. For most of those calls I was on hold for more than two hours before being able to talk to an IRS agent. In desperation, the client and I reached out to representatives in Congress and the IRS Taxpayers’ Advocate. Most tax practitioners simply don’t have the time for this, so their clients’ tax issues are “put on the back burner”.
The IRS phone lines are jammed with people calling about refunds they haven’t received because the IRS hasn’t opened their income tax returns. Congress also made many tax law changes and the IRS issued guidance for unclear issues after the due dates for filing income tax returns and other tax returns. As a result, paper amended tax returns had to be filed, especially for payroll tax returns, increasing the IRS backlog.
The IRS simply doesn’t have enough people to answer the telephone calls they are receiving. Hiring more people should result in shorter wait times for taxpayers and their representatives who are calling for help and having issues resolved faster.
The IRS has also said the computer software it is using is out of date and needs to be updated.
The Inflation Reduction Act, HR 5372, that was passed by the Senate on August 7, 2022 and then by the House of Representatives on August 12, 2022 provides about $3.2 billion to the IRS for taxpayer services through September 30, 2031. About $45.7 billion through September 30, 2031 is provided for enforcing the tax laws (mostly tax audits and collections). About $25.3 billion through September 30, 2031 is provided to support taxpayer services and enforcement programs (infrastructure), including rent payments, facilities services, and physical security. About $4.75 billion through September 30, 2031 is provided to modernize the IRS’s business systems, including improving telephone support for taxpayers. About $15 million through September 30, 2031 is provided to report to Congress a report on the cost of developing a free direct efile tax return system.
I have high hopes that these investments will result in a much better experience of reduced time and trouble when we have to seek help from the IRS, in better enforcement of the tax laws, and in more tax revenue for the federal government without requiring tax increase legislation.