The IRS originally released a strategic operating plan for the $80 billion in funding enacted by the Inflation Reduction Act on April 13, 2023. The Congressional Budget Office estimates that the $80 billion will result in an increase in federal revenue of over $180 billion over 10 years. Although much of the funding remains in place, the funding will be reduced by recent debt ceiling legislation. Specifically, $21.4 billion will be cut from the existing plan that may impact allocation of the budget.
The increased budget means higher examination rates for larger individual accounts, partnerships, and corporations, but a functioning enforcement regime may also support more clarity in tax law.
Objectives of the IRS Spending Plan
The IRS’s plan is structured to achieve five objectives, further detailed below:
Improve Taxpayer Services
The first initiative focuses on improving availability and accessibility, with the aim of helping taxpayers to meet their obligations and receive incentives. The IRS plans to:
- Improve customer service
- Expand digital services and digitalization
- Initiate self-service options
- Provide earlier legal certainty
- Build status-tracking tools for taxpayers
IRS Online Portal
Part of this effort includes the IRS aiming to implement a system for taxpayers to:
- File documentation securely exchange correspondence through an online portal
- Access online accounts with secure account information (also for authorized tax professionals to view client balances, payments, notices, and other correspondence)
Provide taxpayers with new status-tracking tools to see real-time updates, action items, and estimated time to resolve issues. These modernization efforts will take tremendous time and resources, so taxpayers shouldn’t anticipate these changes for several years.
Resolve Issues Quickly
The IRS aims to resolve taxpayer issues more quickly by expanding tax certainty and issue-resolution programs, including the creation of new prefiling programs allowing taxpayers to settle potential compliance issues up front. The plan also calls for adequate staffing of existing programs that have under-delivered to taxpayers.
IRS Outreach
The IRS will engage in outreach campaigns to:
- Increase awareness of existing programs
- Launch a pilot program for taxpayers to participate in prefiling programs and identify priority areas for new tax certainty programs
- Hire specialists to expand existing programs
Focus Expanded Enforcement on Complex Filings and High-Dollar Noncompliance
Nearly 60% of the $80 billion dollar plans are reserved for tax-enforcement initiatives. The strategic operating plan doesn’t detail goals, but IRS commissioner, Danny Werfel, pledged that the IRS had no plans to increase the audit rate for households making less than $400,000 annually.
Proposed IRS Exam Targets
The plan alludes to existing IRS definitions for five areas of proposed IRS exam targets.
- Large corporations: Corporate taxpayers with over $250 million in assets
- Complex partnerships: Partnerships with $100 million or more in assets and 100 or more direct and indirect partners
- Certain individuals: Individual taxpayers with more than $1 million in annual income
- Other coverage declines: Taxpayers engaged in perceived lower-audited areas, including estate, gift, and employment taxation
- Complex, high-risk, and emerging issues: Taxpayers engaged in rapidly changing or potentially abusive tax landscapes, including digital assets, listed transactions, and certain international-tax issues
Deliver Cutting-Edge Technology, Data, and Analytics
- Retire outdated legacy databases and replace them with more closely integrated applications
- Consolidate data to streamline resolution with all information is stored in one application instead of multiple ones
- Focus on privacy protection and data security by implementing any new technologies with the authentication, authorization, accountability, and encryption enforcement necessary to continue to safeguard taxpayer data across its system
- Leverage data analytics to support compliance and enforcement by more readily identifying noncompliance, while also minimizing audits of compliant taxpayers.
- Use data analytics for strategic workforce planning, providing timely insight regarding workforce performance, work surges and hiring demands
Attract Highly Skilled Diverse Workforce and Culture
This objective focuses on hiring practices, training, employee advancement, organizational structures, and culture. The IRS plans to enhance its onboarding and skill-enhancement training to support its evolving strategic operating plan, with a focus on developing a data-savvy workforce.
While promising, the plan only provides high-level estimates for staffing in the years 2023 and 2024. The IRS faces a challenge in recruiting and retaining skilled professionals from private practice. Taxpayers should also keep in mind the IRS has been fighting attrition in their workforce for more than a decade. That means this hiring movement won’t introduce a wave of new examiners. Instead, this is a much-needed effort to rebuild the agency after years of losing employees.
Looking Forward
Beginning June 2023, the debt ceiling and budget cuts package reduces the IRS’s $80 billion in supplemental funding by approximately 25%. Specifically, the deal includes a $1.4 billion claw back of supplemental IRS funding provided in the Inflation Reduction Act. Additionally, the deal repurposes $10 billion of the IRS’s funding in each of fiscal 2024 and 2025.
While the IRS has yet to outline how this reduction will impact their spending allocations, Treasury indicated the IRS has sufficient funds in the short term to rebuild staffing levels and enforce tax laws. With more than $26 billion of the funding not scheduled to be spent until after 2029, further discussions t about IRS funding will be had.
Those with complex tax filings should take note that while enforcement activity may not ramp up until the IRS onboards and trains new employees, the returns being audited in the meantime will likely include those being prepared now and in the next year. Taxpayers should make every effort to comply.
We’re Here to Help
To learn more about tax controversy and gain access to developments as they unfold, contact your Moss Adams professional.
Additional Resources