IRS plans to spend $80 billion on funding boost

There is a lot of anticipation out there in the tax world as it anticipates the IRS is going to detail how it plans to use the $80 billion that it received last year as a result of the Democratic Inflation Reduction Act (IRA).

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It is expected that the federal tax collection agency will receive $80 billion over the next 10 years. This is the largest funding boost the agency has received in decades. There are four main categories of money that are put aside by the IRA: $25.3 billion to support operations, $3.1 billion to help answer the phones, $4.8 billion to upgrade the technology, and a whopping $45.6 billion to enforce laws and audits.

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As a matter of fact, it is the responsibility of the IRS, as well as the Treasury Department, to determine the exact ways in which this money will be spent beyond those general allocations that are made to the IRS. Furthermore, the tax experts from Washington, D.C., who have been briefed on the plans, said on Thursday afternoon that those designations will be made public in addition to those more detailed ones.

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During the inauguration of new IRS commissioner Danny Werfel on Tuesday, Treasury Secretary Janet Yellen announced the plan would be unveiled this week. She also reiterated her promise that audit rates for people making less than $400K a year would not increase, regardless of all the new money being used for audits.

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"With these additional resources, we will be able to peel back complex corporate structures and ensure that large tax-paying entities are paying what they owe by identifying and uncovering them. As I have mentioned before, I have directed that these resources will not be used to raise the audit rate of small businesses and households which make less than $400,000 a year, as compared to historical levels,” Yellen said Tuesday.

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The way that the new money is going to the IRS has been the subject of some notable criticism, especially when it comes to IRA deductions. Some critics of the funding boost say too much of the money is being allocated to audits as opposed to basic taxpayer services and the adoption of new technology, which has been outdated for quite some time now.

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“This IRA allocation has been made in a manner that does not meet the needs of American taxpayers, including individuals, families, and businesses." In a blog post earlier this month, the National Taxpayer Advocate at the IRS, which is an office within the IRS that strives to influence policies on behalf of workers and families rather than big businesses, outlined this claim.

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"There is no doubt that taxpayer service and technology are the two areas where we can improve most urgently, and this is a no-brainer. A proactive approach from the IRS could reduce back-end enforcement needs if they provided timely and clear guidance, more transparency, and more front-end services in a proactive manner," according to advocate Erin Collins.

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Officials and lawmakers have used the "tax gap" as a justification for the new money for enforcement, which is the amount of money that the government owes each year but is unable to collect.

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In the period between 2017 and 2019, the IRS has projected that U.S. exports will reach about $470 billion, or roughly 2.4 percent of total U.S. production. Tax gaps are measured retrospectively, and the latest hard numbers available for this period are for 2014 to 2016, which show an average annual tax gap of $428 billion during this time period.

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Most of the tax gap is a result of people and businesses underreporting their income to the government, but the largest portion of the tax gap comes from individual business income, which is $130 billion per year, making up almost 40% of the tax gap. In most cases, these are business entities that have legal designations like S-corporations, partnerships, and limited liability companies.

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Each year, large corporations fail to pay $23 billion in taxes, while small corporations come up short by $14 billion in taxes.

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Upon the release of the plan on Thursday, they will be paying a lot of attention to how it is going to be able to reduce the tax gap while keeping the Biden administration's promise to keep audit rates unchanged for those making under $400,000 a year after the plan is released.

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There has been a steady decline in audit rates across the board over the last decade. The Government Accountability Office (GAO) found in a study released in 2022 that the audit rates of high earners have been declining more rapidly than those of low-income earners in recent years, which is in stark contrast to the increase of audits for low-income earners in recent years. There was a 21.2 percent chance that taxpayers making more than $10 million a year would be audited in 2010 and a mere 3.9 percent chance that they would be audited in 2019. There is a 13.5 percent chance that taxpayers making between $5 million and $10 million are likely to be audited in 2010, and a 1.4 percent chance that taxpayers making less than $5 million are likely to be audited.

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The audit rates for taxpayers with incomes between $50,000 and $75,000 have declined from a 0.7 percent chance in 2010 to a 0.1 percent chance in 2019.

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The median household income in the U.S. was $70,784 in 2021, basically unchanged from the previous year. Based on data provided by the Census Department, it appears that income inequality, as measured by the Gini Index, increased by 1.2 percent between 2020 and 2021.