The IRS on Thursday released a long-awaited blueprint on how it will spend the nearly $80 billion it got in last year’s tax and climate law, with Commissioner Danny Werfel strengthening the agency’s vow to not increase audit rates for households making under $400,000.
The 146-page plan includes estimates of how the funds will be allocated, as well as timetables for initiatives to improve taxpayer services, technology, enforcement, and hiring.
Treasury Secretary Janet Yellen had directed the IRS to not increase audit rates for households and small businesses making $400,000 or less, relative to historical levels. In a call with reporters Thursday, Werfel went a step further, saying, “The IRS has no plan to increase the most current audit rate we have for households making less than $400,000.”
The IRS will soon publish audit data for 2018 that show a “historically low rate,” Werfel said. While Yellen’s directive referenced historical levels, which could give some wiggle room for the IRS to raise the current audit levels for the middle-class, Werfel said the agency will spend many years focusing solely on increasing audits on high-income individuals and corporations.
“During this time, the audit rate for average taxpayers will not be increasing and as a result we will not come close to hitting or exceeding any historic average rate,” he said. “People who get W-2s or Social Security payments or have a small business should not be worried about some new wave of IRS audits—We’re taking that off the table.”
The multiyear funds, which can be spent through the end of fiscal 2031, were included in last year’s Inflation Reduction Act. The report estimates how money from the IRS’s four main appropriations accounts—taxpayer services, enforcement, operations support and business systems modernization—will be spent.
The agency estimates it will spend the majority of the funds—$47.4 billion—on expanding enforcement for taxpayers with complex returns and large dollar amounts of non-compliance. That includes $41.7 billion of the enforcement funds, $5.5 billion of the operations support funds and $200 million of the taxpayer services funds, according to the report.
The IRS estimates it will spend $4.3 billion on improving taxpayer services, $3.2 billion on efforts to promptly resolve taxpayer issues, and $12.4 billion on technology modernization.
Additionally, the IRS plans to spend $8.2 billion on attracting and retaining employees, mostly using operations support funds, and $3.9 billion on implementing clean energy tax incentives in the law, mainly through funds from the taxpayer services and enforcement accounts.
The new funds will support 19,545 full-time equivalent employees in fiscal 2024, a figure previously disclosed. The plan doesn’t provide a total number of employees the IRS plans to hire with the new funds through fiscal 2031.
Werfel said the agency plans to soon release employment estimates for fiscal 2025 but said a lot is involved in projecting staffing levels, particularly as the agency implements new technologies.
“I hope that we can get better and better at forecasting, but I just think it’s good management and leadership practice to look at these things in a three-year window and provide that type of precision,” Werfel said.
The plan is based on the assumption that the IRS’s annual appropriations remain at fiscal 2022 levels plus adjustments for inflation, and the IRS will need additional funds beyond what it received in the Inflation Reduction Act to achieve goals for taxpayer services and business systems modernization, the agency said in the report.
The IRS has long been under fire by watchdogs and lawmakers for its customer service, with its challenges in this area exacerbated by the pandemic. The agency has already used some of its new funding to make taxpayer-service improvements, including to its telephone service.
The agency lays out several goals it wants to achieve to improve taxpayer services, including making customer service more accessible, increasing the number of forms that can be filed electronically and that can be digitally scanned if filed on paper, and giving taxpayers access to their own data.
Much of this work will be focused on expanding online accounts for taxpayers and tax professionals. The agency this year plans to launch online accounts for businesses and to develop a plan for enhancements to the accounts for businesses as well as individuals and tax professionals. It’s also aiming this year to expand payment features in online accounts over the next several years. By fiscal 2025 the IRS is aiming to allow taxpayers to see items in their online accounts such as notices, letters, and balances due.
The IRS is also planning several initiatives designed to increase outreach to taxpayers. The agency is aiming by fiscal 2025 to create a system where taxpayers can opt into receiving alerts from the agency and provide the agency with information about life changes so that they can be educated about the potential tax implications of their new circumstances. It’s also seeking to expand efforts to educate taxpayers about incentives that they may be eligible to claim.
Additionally, the plan calls for hiring more employees in the IRS chief counsel’s office and the Treasury tax policy office by fiscal 2024 to expand the ability for Treasury and the IRS to issue formal and informal guidance to provide clarity for taxpayers. The plan also calls for increasing the options taxpayers have for verifying their identities.
Tax lawyers called it smart for the IRS to put an emphasis on customer service at the beginning of the report.
Jorge Castro, a member at Miller & Chevalier who has worked at the IRS and as a congressional Democratic tax aide, called it “as comprehensive of an IRS strategy plan as I’ve read in a long, long time.”
Leading with the customer service section speaks to the political sensitivities of the IRS funding, he added.
National Taxpayer Advocate Erin Collins said in a blog post Thursday that she appreciates the plan’s vision of providing taxpayers and tax professionals with the ability to get assistance in a timely fashion and through a variety of mediums. But she said the agency still needs to focus also on its short-term need to reduce its backlog of amended tax returns and correspondence.
“Although the SOP offers the promise of many positive changes in the coming years, I urge the IRS to put appropriate focus on getting its inventories under control now and not lose sight of its core mission,” she wrote.
The backbone of ramping up the IRS enforcement effort relies on improved technology that identifies filings that might not comply with tax laws, as well as hiring and training new staff to expand audit coverage on the wealthy and large corporations. Rates on auditing millionaires, large corporations and partnerships fell by 77%, 44%, and 80% respectively between 2010 and 2017, according to Treasury.
To reverse the slide, the agency said last month it seeks to use IRA funding to support more than 1,500 full-time equivalent enforcement employees this year and support a total of 7,239 enforcement employees the following year. The report notes plans this year to hire its initial tranche of specialists to increase audit rates for high-income individuals and large corporations and partnerships.
Some of the agency’s specialized new hires would staff offices like the Independent Office of Appeals and the Office of the Chief Counsel, to resolve issues and support compliance, appeals and even assist in litigating cases.
The agency also highlighted the way it prioritizes and selects cases and vowed to “consider redesigning the compliance organization to a more centralized approach.”
Compliance prioritization and case selection currently is decentralized across the IRS, and while some teams use risk analytics tools they don’t work in unison, the report said.
The agency said it hopes to propose changes to its organizational structure and establish centralized planning and strategy functions by 2024. It hopes to have those centralized analytics systems in place by fiscal 2026, which it hopes will aid auditors in choosing which cases to examine.
The IRS is also aiming to resolve errors on taxpayers’ returns more quickly. The agency is aiming to notify taxpayers about possible issues with their returns at the point of filing so that returns can be corrected and resubmitted before the agency processes them. It’s also planning to expand programs where the IRS and taxpayers work to resolve any issues before a return is filed, and refine interventions for when the IRS identifies issues with a return after it is filed.
For many years the IRS has been criticized for a technology infrastructure so woefully outdated it includes some of the oldest systems in the federal government. Parts of the system, like the Individual Master File that processes data about individual taxpayers, date to the 1960s and much of the agency’s data is not standardized.
By itself, the IT infrastructure represents one of the biggest pieces to the funding’s success.
“A modern data architecture and system are critical to enabling all other initiatives,” the report said.
The proposal calls for investing $9.2 billion in operations support and $3.1 billion in business systems modernization, which would also include the addition of hundreds of full-time-equivalent workers.
The IRS plan sets a series of initiatives running from fiscal 2023 to 2028 that would move the IRS away from its paper- and data entry-heavy present into an automated future. It also seeks to shift IT teams to a new way of operating, in hopes of breaking down the distance between business and IT groups.
Modernizing the systems used to access and process taxpayer data requires the rewriting of outdated code and consolidating data siloed in different systems into one place where both taxpayers and IRS employees can access it more easily, the agency said.
The hope is to make it easier for IRS employees to interact with taxpayers by integrating information that’s currently stored in multiple data systems into one place. It also said it hopes to analyze data to do things like better understanding taxpayer behavior and enhancing strategic planning.
By fiscal 2028, the agency said it hopes to retire a bevy of platforms, including the business and individual master file systems.
One of the agency’s major concerns is protecting its systems from cyber attacks as it plots its ambitious transformation.
“We already prevent and block billions of unauthorized access attempts, scans attacks, and probes every year,” the report said.
As part of its plan, the agency laid out a plan to shore up its cybersecurity by fiscal 2026, saying success on the initiative would mean all taxpayer data was “internally encrypted and segmented to limit exposure to threats and compliant with all federal standards and guidelines.”
The IRS said it will need about $3.9 billion to implement the new clean-energy tax credits and other energy-security provisions contained in the law, well above the $500 million appropriated specifically for that purpose. The money will be spent on modernizing technology and hiring new staff, among other purposes.
The IRS said it is “actively working” to implement the clean-energy provisions, including developing approaches to determining whether taxpayers are following labor, environmental, and domestic-content standards needed to claim the credits. The aim is to make the process for claiming the credits “as seamless as possible while addressing the risk of potential fraud,” the IRS said.
— With assistance from Michael Rapoport.
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