Update 685: This Year’s Tax Day Haul:
Assisted by $80 billion SOS for the IRS
Today is the deadline for most American taxpayers to file individual tax returns. Taxpayers might notice that this year’s IRS is faster, more responsive and easier to reach, thanks in large part to the $80 billion dollars the agency received in the Inflation Reduction Act last year. Last week, the IRS released its plan to continue bolstering taxpayer services and expand enforcement efforts against wealthy tax cheats. Republicans are expected to release plans for massive spending cuts soon, expected to include cuts to the IRS budget, which of course aggravates our fiscal imbalance.
This year, however, tax receipts have added import. An increase in the Treasury cash reserves of more than $200 billion following this year’s tax day would extend the debt ceiling’s X-date; less than $150 billion would not move that date beyond current expectations. Tax Day in future years will see a change in the process and equity outcomes due to the $80 billion provided to the IRS under the IRA. How and by how much is detailed below. More on the IRS’s Strategic Operating Plan and the improvements taxpayers can hope to see in the coming years below.
Last week, the Internal Revenue Service released a report detailing its plan to use roughly $80 billion from the Inflation Reduction Act (IRA) to improve the taxpayer experience, modernize its systems, and expand enforcement actions against wealthy tax cheats. The plan outlines five objectives the agency will work to achieve in the coming years:
- Dramatically improve services to help taxpayers meet their obligations and claim the tax incentives for which they are eligible
- Quickly resolve taxpayer issues
- Expand enforcement on tax filers with complex filings and high-dollar non-compliance
- Use technology, data, and analytics to operate more effectively
- Recruit and retain a skilled workforce that is better equipped to meet taxpayer needs
The IRS’s plan should not only improve the taxpayer experience but will also allow the IRS to once again pursue audits of wealthy taxpayers, areas in which the IRS has struggled as its budget has shrunk. The agency has already made improvements to taxpayer service using IRA funding and will continue to do so in the coming years. Enforcement expansion will take some time but will allow the agency to address some of the inequity in audit rates that has built up over the last decade.
The IRS has been in serious need of a budgetary overhaul for some time. Between 2010 and 2021, the agency’s budget decreased by 22 percent, adjusted for inflation. Since 2010, the agency’s staff has shrunk from roughly 95,000 full-time equivalents (FTEs) to only 80,000, an over 15 percent decrease. During the same time, the population has grown by roughly 7 percent, the tax code has grown more complex, and the number of filings the agency had to manage increased, generating a larger workload for the already shrinking staff.
During the pandemic, the long-standing issues at the IRS reached a boiling point. The chronically understaffed agency did an admirable job quickly pushing out Economic Impact Payments and administering monthly Child Tax Credit Payments at the height of the pandemic, but these efforts drew even more resources away from normal operations and left the IRS with a massive backlog of returns to wade through and the ability to answer only 1 in 4 customer service calls.
Congress attempted to reverse this trend with the IRA by appropriating an unprecedented $79.6 billion to bolster enforcement and taxpayer services, support operations, and jumpstart systems modernization efforts. However, this investment sparked serious controversy as some Republicans even began to spread conspiracy theories about armed IRS agents. This anti-IRS sentiment ultimately resulted in a 2 percent cut in annual appropriations for the agency in FY23 compared to FY22 levels, zeroing out the Business Systems Modernization account. This means that the agency will not be able to complete the IT modernization projects it described in the plan, and that the IRS will need to use some of its IRA funding to cover normal operations.
While the IRA funding will go a long way towards improving the situation at the IRS, the hostility the agency faces is still troubling, particularly as the House majority contemplates massive cuts to discretionary spending in FY24. The IRS will need budget increases to keep pace with inflation just to maintain its steady-state operations. Offering it anything fewer risks reversing the progress made last year.
IRS = Increased Responsiveness and Services
The IRS has taken a number of steps this year to improve its customer service experience, including:
- Hiring over 5,000 new customer service representatives and beginning the hiring process for roughly 650 new employees for Taxpayer Assistance Centers nationwide
- Reducing the inventory of unprocessed individual returns to pre-pandemic levels
- Achieving a level of service between 80 and 90 percent weekly during filing season
- Providing a customer callback option for 75 percent of calls to IRS live assistance lines, with plans to expand to 95 percent
- Giving taxpayers the option to respond to IRS notices electronically
Using funding from the IRA – of which $3.2 billion was specifically appropriated for taxpayer services and education – the IRS will continue to build on this progress. The IRS plans to expand in-person, phone, and digital customer service options so that taxpayers and tax preparers can interact with the agency using the method that they prefer. It will also continue to expand its workforce, shift a larger portion of its workforce towards taxpayer-facing roles, and better equip staff with the tools they need to assist taxpayers.
Additionally, the IRA provided $15 million to produce a report on the feasibility and cost of a free direct e-file program run by the IRS. Tax preparers like Intuit and H&R Block have lobbied extensively against such a program, which would make filing taxes cheaper and easier for taxpayers. The current Free File program, which is run by third parties, can be complex and difficult to navigate, particularly when companies like Intuit trick users into paying for services that they should have been able to access for free. The direct efile report will be released in May and could mark another important step in improving taxpayer services.
Despite claims by some IRS opponents, the IRS does not now, nor does it plan to, arm its agents. The agency will also not use IRA funds to increase audits against the average taxpayer. Not only did Secretary Yellen instruct the agency not to use IRA funds to increase audit rates against taxpayers making less than $400,000, but the IRS plans to use much of that funding to make it easier for taxpayers to navigate the complexities of the system. This includes expanding customer service options for taxpayers, offering increased formal and informal guidance, taking steps to notify taxpayers of issues with their filings earlier, and offering more accessible ways to resolve issues.
Where audits can and should increase, however, is among wealthy taxpayers with complicated returns. Audits on high-income taxpayers take significantly more time, resources, and expertise than audits of lower-income taxpayers. As the IRS has lost critical resources, it has also lost its capacity to perform these complex audits. While audits have decreased across the board in recent years, they did so more for high-income taxpayers than EITC recipients, who are much easier to audit electronically. IRA funding will allow the IRS to begin correcting this inequity by backfilling open positions for revenue agents.
Between 2014 and 2016, the IRS estimates that the gross tax gap averaged $496 billion annually, about 18 percent of federal taxes owed. During the same period, the net tax gap, the gap that remains after the IRS has sought to collect unpaid taxes, averaged $428 billion annually. More recent estimates put the annual tax gap closer to $600 billion, with $163 billion in unpaid taxes coming from the top 1 percent alone.
The $46 billion from the IRA allocated to enforcement is expected to help narrow the gap. According to Congressional Budget Office estimates, the Inflation Reduction Act would raise $180 billion dollars in revenue over ten years. Given that this estimate includes only additional revenue from direct enforcement and not increases in voluntary compliance expected to result from investments, the actual number may be larger.
The IRA was a massive win for effective tax administration and tax fairness. A modernized, well-staffed IRS will be better equipped to meet the needs of average taxpayers and ensure that wealthy taxpayers who try to cheat the system will have to pay what they owe. The actions taken over the last year to make the agency more efficient and effective have been important strides toward restoring not only the IRS’s operating capacity but also the public’s trust in the agency. Congress must ensure that the IRS receives adequate funding to build on this success in the years to come.
In addition, the new resources provided to the agency bear on the Treasury’s cash reserves and the ability of the federal government to pay its debts. The Treasury’s cash account last Wednesday sat at $87 billion, the smallest amount since December 2021, when the US was also wrangling with a debt-ceiling battle. That amount shifts by tens of billions of dollars in a given day, so the size of tax take this week can move the X-date, with an anticipated influx of tax money on June 15 — and stave off default by some critical weeks this summer when the default is around the corner.