The United States officially set up the Internal Revenue in 1953 as the successor of the Bureau of Internal Revenue. In seventy years, the agency touches the lives of nearly every American through the implementation and enforcement of tax law, collections, audits, and administering pandemic relief payments and the Paycheck Protection Program. Few Federal agencies cause as much anxiety and frustration as the Internal Revenue Service. The most positive view of the agency is an annoying, annual inconvenience.
Anyone who interacted with the IRS in the last five years beyond filing a return probably felt emotions ranging from frustration to rage. Contributing factors to these negative emotions include hours-long hold times on phone lines, months of waiting for responses to correspondence, notices issued in error, a lack of experienced staff, and a belief the agency targets particular groups. In the last decade, the IRS contended with budget cuts, the attrition of experienced employees, outdated and inefficient systems, and mountains of paper stacked everywhere waiting to be processed.
The passage of the Inflation Reduction Act and later negotiations brings $60 billion to the IRS. Roughly $25 billion will be allocated to enforcement/collection, $29 billion to taxpayer services, and $6 billion to modernize technology. In ten years, the IRS hopes to increase its workforce by 70%.
Enforcement
The IRS hired 4,000 revenue officers and revenue agents, including 400 criminal investigators. The agency resumed issuing notices and levies suspended during the pandemic, and added efforts will be made to pursue delinquent taxpayers.
The agency also will increase its audit rate to over 1% of returns filed, a 100% increase from the current audit rate. The agency says its audit efforts will focus on high-net-worth individuals, particularly those making over $500,000 annually. However, lower-earning taxpayers might indirectly be affected by an increase in audits on businesses.
Expected targets for increased enforcement will likely include:
- S-corporations and other passthrough entities – particularly the reasonable compensation of owners
- Worker classification (W-2 employee vs. 1099 contractor)
- Payroll – particularly the Employee Retention Credit
- Cryptocurrency
- Foreign bank and financial accounts (FBAR)
- Schedule C filers
Service
With the addition of 6,000 phone agents this year and more in the future, the IRS hopes to decrease hold times on its phone lines, help taxpayers resolve relatively simple issues over the phone, and improve the overall taxpayer experience. The IRS should also use its new funding to clear the massive backlog of paper in its service centers.
Technology
Paper is still the IRS’ biggest problem both from an efficiency and budget standpoint. The overwhelming suggestion by taxpayer advocates to improve the IRS is the implementation of modern document scanning technology, data security, and data analytics.
For the 2024 filing season, the IRS will roll out a pilot program for Free File, a free-file tax return system. Currently, the IRS outsources its Free Filing to outside vendors. The IRS will develop its own Free File program, which it hopes will be used by most 1040 filers with simple returns within five to seven years. It will try to expand its Free File program to include State returns too.
With the upcoming battle over the Federal budget and a looming 2024 election, the future of the IRS as outlined here is not certain. Priorities change with the changing makeup of Congress and the Executive branches. Expect extensive lobbying by tax reform advocates, CPAs, and the tax preparation industry.
No matter what the future holds, taxpayers should benefit from a modern, more efficient, and professionally staffed IRS. At the very least, taxpayers can hope their future interactions with the IRS become less frustrating.
