The IRS, in its second full year with the infusion of billions in tax-and-climate law funds, is set to continue its 150-page plan for the money and flaunt to Congress just what a funded IRS can do.
Since it was provided the new funds, the Internal Revenue Service has started to revamp how it’s going after tax cheats and make it easier for taxpayers to manage what they owe.The recent IRS restructuring—the addition of four new top leadership roles and slim down to one deputy commissioner—further cements what the agency plans to prioritize in the coming year: taxpayer service, tax compliance, operations, and information technology.
Those priorities hinge on whether the IRS has cash to make these improvements. If funds from the Inflation Reduction Act shrink or annual appropriations get cut further, the agency will be hamstrung on more changes and will instead shift to maintaining day-to-day operations.
“We don’t know what’s going to be left at the end of the day and that will clearly impact the priorities,” said Todd Simmens, BDO’s national managing principal of tax risk management.
Here’s what’s ahead for the IRS in 2024.
Keeping the Cash
The IRS gets a chunk of discretionary funding in the appropriations process every year. IRS Commissioner Danny Werfel has cautioned Congress that if IRS appropriations funding is chipped away further, the agency will have to use the tax-and-climate law funds just to stay afloat.
Republican lawmakers have made multiple attempts to steer the funding set aside for the IRS in the tax-and-climate law toward other domestic programs. In a handshake deal in the spring that was part of an agreement to suspend the debt limit, President
Hiring, modernization, and compliance efforts all require money, said Rochelle Hodes, principal at Crowe LLP, and if funding gets cut “what happens to the investments the IRS has already made?” The IRS would have to make some very uncomfortable decisions, she added.
Treasury Department and IRS officials have said they don’t expect the planned IRS cuts in the debt-limit deal to impact the agency’s modernization work in the near-term, and plan to push for the agency to receive additional funds.
Appropriations legislation to fund the government is often a vehicle for tax bills, and if tax-code changes get passed, the IRS’s plate could get fuller. Though the possibility of a tax package has bipartisan support, Congress has a small window to make it happen.
If Congress doesn’t fund the government in early 2024, the IRS faces disruption as it stares down another filing season. The IRS’s annual appropriations currently are set to expire in early February, and filing seasons typically begin in January.
Enforcement Efforts
The IRS has pointed to wealthy individuals, partnerships, and foreign companies that aren’t paying what they owe as the target of heightened enforcement efforts.
Robert Kovacev, member at Miller & Chevalier, said he expects more litigation at all levels related to these taxpayers next year.
The IRS is also cracking down on fraudsters taking advantage of the employee retention tax credit that was designed to help businesses keep employees on the payroll. It paused the processing of new claims until at least the new year and created some relief programs for taxpayers that wrongly claimed credits.
The legitimacy of ERC claims is popping up more often, especially during due diligence reviews when companies are being acquired, said Colin Walsh, tax principal and practice leader of tax advocacy and controversy services group at Baker Tilly. While it doesn’t necessarily kill a deal, it is negotiated into the purchase price.
That IRA infusion is also fueling a commitment to taxpayer service—getting special attention from Treasury Secretary
Court Challenges
Everyone in the tax world, including IRS officials, are watching how two major Supreme Court cases play out.
Moore v. United States deals with whether a tax on companies’ past foreign earnings is constitutional, and whether income that hasn’t been “realized” by taxpayers can be taxed. If the court strikes down the tax, large multinationals that have paid billions because of the tax might be entitled to a refund and the IRS may need to create a refund system to manage, Hodes said.
Arguments in Loper Bright Enterprises v. Raimondowill be heard before the Supreme Court on Jan. 17. The case will give the justices the opportunity to reverse the landmark Chevron doctrine that provides that courts should generally defer to agencies’ interpretations of ambiguous laws. The decision could significantly alter how federal agencies—including the IRS and Treasury—promulgate regulations.
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