IRS to release plans for spending $80 billion funding boost

The tax world is getting ready for a detailed IRS breakdown of how it plans to spend the $80 billion it was awarded in Democrats’ Inflation Reduction Act (IRA) passed last year.

The $80 billion will be spent over the next 10 years and represents the most substantial funding boost for the federal tax collection agency in decades. The IRA breaks the money down into four main categories: $25.3 billion for operations, $3.1 billion to help answer the phones, $4.8 billion for new technology, and a whopping $45.6 billion for enforcement and audits.

Get those taxes in: IRS funding boost sets high hopes for smoother tax filing season 

Beyond those general allotments, it’s up to the IRS and the Treasury Department to spell out exactly how that money will be spent. Those more detailed designations will be made public Thursday afternoon, according to two Washington, D.C., tax experts briefed on the plans.

Treasury Secretary Janet Yellen said Tuesday during the swearing-in of new IRS commissioner Danny Werfel that the plan would be unveiled this week and repeated a promise that audit rates wouldn’t be going up for people making under $400,000 a year despite all the new money for audits.

“These additional resources will help us peel back complex corporate structures and large taxpaying entities — and make sure that they pay what they owe. As I’ve said before, I have directed that these resources will not be used to increase the audit rate for small businesses and households making under $400,000 a year, relative to historical levels,” Yellen said Tuesday.

There has been some notable criticism of how the new money for the IRS was broken down in the IRA. Critics of the funding boost say too much of it is going to audits as opposed to basic taxpayer services and new technology, which has been outdated for years.

“The IRA allocated the funds in a manner that does not address the needs of U.S. taxpayers, including individuals, families, and businesses,” the National Taxpayer Advocate, the office at the IRS that tries to influence policy on behalf of workers and families as opposed to big business, wrote in blog post earlier this month.

Second thoughts: Taxpayer advocate urges Congress to reconsider $80 billion IRS funding boost

“It’s a no-brainer that the areas that require improvement most urgently are taxpayer service and technology. And if the IRS would provide timely and clear guidance, more transparency, and more front-end services in a proactive manner, it could reduce back-end enforcement needs,” advocate Erin Collins wrote.

Lawmakers and officials have justified the new money for enforcement by pointing to the “tax gap,” which is the amount of money that the government is owed each year but does not collect.

That was about $470 billion a year between 2017 and 2019, the IRS recently projected, or roughly 2.4 percent of total U.S. production. The tax gap is measured retroactively and the latest hard numbers are for the years 2014 to 2016, when it averaged $428 billion a year.

Almost all of the tax gap is due to people and businesses underreporting their income to the government, but the largest segment comes from individual business income at $130 billion per year. Those are businesses that typically have legal designations as S-corps, partnerships and LLCs.

Large corporations fail to pay $23 billion per year while small corporations come up short $14 billion annually.

With the release of the plan on Thursday, much attention will be paid to how it will be able to reduce the tax gap while still keeping the Biden administration’s pledge of keeping audit rates for people making under $400,000 a year unchanged.

Coming soon? Here’s what a free IRS e-filing tax return system could look like

Audit rates have been falling across the board for the last decade. While high earners are audited at higher rates than lower earners, high earners have seen their audit rates decrease more rapidly in recent years than people earning less money, a 2022 study by the Government Accountability Office (GAO) found.

Taxpayers making more than $10 million a year had a 21.2 percent chance of being audited in 2010 and just a 3.9 percent chance of being audited in 2019. Taxpayers making between $5 million and $10 million had a 13.5 percent chance of being audited in 2010 and a 1.4 percent chance of being audited in 2010, according to the GAO.

For taxpayers making between $50,000 and $75,000, their audit rates fell from a 0.7 percent chance in 2010 to a 0.1 percent chance in 2019.

Median household income in the U.S. was $70,784 in 2021, basically unchanged from 2020. Income inequality as measured according to the Gini Index increased by 1.2 percent between 2020 and 2021, Census Department data shows.