A major new climate, health care, and tax bill known as the Inflation Reduction Act was recently signed by President Biden. The $700 billion package aims to reduce the federal deficit by decreasing health and energy costs and giving the IRS a much-needed facelift.
The package includes an $80 billion annual budget increase for the IRS. This will allow the agency to dedicate more time and resources to auditing large corporations and wealthy taxpayers.
Here’s what you need to know about the increase to the IRS budget.
How Does the IRS Plan to Spend $80 billion?
The Inflation Reduction Act provides the IRS with nearly $80 billion to enhance enforcement, employment, and operations.
According to IRS data, budget cuts and decrease in staff over the past several years has led to the audit rate reaching a decade-long low. Lawmakers are hopeful a rejuvenated IRS can decrease the federal deficit by pursuing more lucrative audits and collecting billions that get lost in the “tax gap”—the difference between taxes owed to the government and those that have been paid.
The IRS plans to dedicate $45.6 billion to help strengthen its enforcement division by hiring more enforcement agents and upgrading outdated technology. These funds would also be used to improve the monitoring of cryptocurrency transactions.
“One of the only things preventing taxpayers from making things up is the tax exam,” says Gordon Law Group tax attorney Dan Urban. “One of the big initiatives is going to be to increase the level of exams, especially for taxpayers making over $200,000 a year.”
With more than half of the funding going toward enforcement, the remainder of the budget will be geared toward improving taxpayer services, operations, and business systems. Taxpayers witnessed the impact that budget cuts and low staff can have on a government agency during the 2020 pandemic.
“Over the last 10 years, the IRS has steadily declined in its staffing, and this has resulted in numerous headaches for taxpayers trying to reach them,” says John Nagle, senior tax attorney at Gordon Law Group.
“With the $3 billion increase to their taxpayer services division, that will allow for a much quicker hold time and hopefully being able to get an answer resolved before you have a balance owed to the IRS.”
Still, some lawmakers think that a higher percentage of the proposed budget increase should go toward taxpayer services rather than enforcement.
“I’ve been in this business for 12 years and I’ve seen the IRS go from a well functioning entity, to basically one step away from collapse,” says Urban. “The IRS has 21.3 million tax returns as of June 22nd of this year according to the National Taxpayer Advocate mid year report.”
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Who Will Higher Audit Rates Affect the Most?
Corporations earning over $400,000 or more per year and taxpayers earning more than $200,000 or more per year will be a top priority for the IRS’s enforcement efforts.
“The federal government gets a lot of egg on their face so to speak, from larger corporations who pay $0 income tax,” says Urban. “You don’t have to look too hard through Google searches to find plenty of U.S. corporations who pay little to no income tax.”
The goal of the increase in funding is to beef up the number of experienced enforcement agents, accountants, and lawyers available to help combat the more complicated cases instead of solely focusing on middle income taxpayers.
“Currently, the IRS spends about 50% of its audits on households that make $75,000 or less,” says Nagle. “The reason they do this is because households with less income are less likely to contest the audit results.”
For households making $75,000 or less, the IRS makes $10 for every $1 it spends in the collection process.
“With the additional resources, the goal is for the IRS to target high-income households, wealthier individuals; however, this may not be the actual reality for the IRS increase in funding.”
Worried You Could Be Next? We Can Help!
More funding means more audits are on the way! Are you worried about a potential tax mistake you’ve made in the past? Concerned the IRS could be coming for you next?
We can help you determine your next move and the best solution for you! Our award-winning attorneys will develop a plan unique for your situation and get started on resolving your issue.