On August 16, President Biden signed the Inflation Reduction Act of 2022 into law, completing the final component of his economic campaign. The bill contains various revenue raising provisions estimated to generate approximately $760 billion and spending programs costing approximately $430 billion over a 10-year period.
To reduce the federal deficit and lower inflation, the bill contains a few revenue-raising provisions that rely on revisions to tax laws. Among these are a 15% minimum tax on corporate book income, as well as a 1% excise tax on stock buybacks. Although these provisions are expected to generate substantial tax revenues, the former will only impact corporations with profits over $1 billion, and the latter may have tax implications on any publicly traded domestic corporation where an individual shareholder or shareholders sell their stock in that company back to the corporation.
But today, let’s discuss one revenue-raising provision that aims to enforce tax laws that currently exist, rather than create new ones. The Inflation Reduction Act outlines a near-$80-billion investment in the IRS to help reduce the “tax gap,” or the difference between what people pay in taxes and what they owe. Currently, the Treasury Department estimates the annual tax gap is about $600 billion, which the bill hopes to cut down by about $124 billion in revenue from tax enforcement over the next decade, according to a Congressional Budget Office estimate.
Where is the IRS funding going?
The bill outlines roughly $79 billion for the IRS to be phased in over 10 years. $45.6 billion is earmarked toward tax enforcement, $25.3 billion toward operations support, $4.8 billion toward business system modernization and $3.2 billion toward taxpayer services.
This means the funding will prioritize collecting owed taxes, conducting criminal investigations, and investing in new IT systems, according to IRS Commissioner Charles Rettig. IRS Commissioner Rettig specifically noted an increase in audit rates, back to historical norms, for large corporate and global high-net-worth taxpayers as well as in new areas such as pass-through entities and multinational taxpayers with international tax issues. Furthermore, he notes that the investment will not result in increased audit scrutiny on small businesses or middle-income American households making under $400,000.
A Treasury Department report from May 2021 estimated an investment of this size would enable the agency to hire roughly 87,000 people by 2031. While the act does not specifically state that the money will be used to hire this exact number of new agents, it’s reasonable to suspect that revenue-raising tax enforcement will require the IRS to beef up its staff and hire new employees. Just how many — and in what capacity — is still uncertain.
Attempting to reverse a decade of decay
One thing is certain: the agency needs help. Since 2010, the IRS’s budget and enforcement staff have been cut significantly, impairing its ability to appropriately perform its role as the country’s tax collection agency. A lack of resources and support has prevented the IRS from properly enforcing tax laws, and also backlogged the processing of returns, filings and notices. As of the writing of this article the IRS has approximately 9.7 million unprocessed individual income tax returns.
Now, many businesses and individuals are struggling with an unresponsive and delayed IRS, largely due to the lack of staff and funding. Many taxpayers who filed for a refund over a year ago have still not received it or a clear response from the IRS regarding its status.
Frustration over delays is understandable, but there are limited actions that even tax professionals can take to expedite the process.
Of course, contacting the IRS is the first step. But since the agency doesn’t have enough staff to answer the phones, callers are usually met with a pre-recorded message asking them to call back due to high call volumes. This is not surprising, since in the first half of 2021 alone, there were fewer than 15,000 IRS employees available to answer nearly 200 million calls, which is one person for every 13,000 calls, according to Treasury Department figures.
With $25.3 billion allocated for operations support and $3.2 billion for taxpayer services, the IRS will get a much needed shot in the arm to provide taxpayers with more responsive, efficient service.
The TAS: A short-term solution
Funds will be dispersed throughout the next decade as a long-term solution to a long-standing issue. The added staff should help the IRS process income tax returns, amended tax returns and other types of filings for taxpayers, but hiring is a national challenge across all industries. Recruiting and onboarding necessary staff will take time, and taxpayers may still find themselves disputing matters with a pre-recorded answering machine while the IRS awaits new support staff.
In the meantime, businesses and individuals should be aware of other means available to alleviate some of the headache. The Taxpayer Advocate Service (TAS) is a resource offered by the IRS to help taxpayers when faced with tax problems that they can’t solve on their own. As an independent organization within the IRS, the TAS is responsible for ensuring that every taxpayer is treated fairly, and that they know and understand their rights.
Specifically, the TAS can ensure that the IRS provides the taxpayer services that it should in an appropriate and timely fashion. When taxpayers experience a problem or delay while processing returns, notices or filings, that’s where TAS can step in to facilitate a resolution.
Any taxpayer can take advantage of the group’s services by filling out a Request for Taxpayer Advocate Service Assistance, which can be found on their website as Form 911. The form is four pages long, and while you can fill it out on your own, it can also be filed on your behalf by your tax professional as power of attorney. The TAS will review your form, and — assuming you meet the criteria — step in and contact the relevant IRS office or agent, who will then expedite the request.
When to get the TAS involved
The efficiency with which the TAS acts can be quite amazing, but there are certain criteria you must meet to receive their service.
First, your tax problem must be causing financial difficulty for you, your family or your business. For example, a small business that’s expecting a large refund may be struggling to keep their business running from a cashflow perspective, which would qualify them to seek help from the TAS.
If a taxpayer is not struggling financially, they (or their business) must be facing an immediate threat of adverse action. The IRS has been known to issue notices readily and often without the necessary support to handle them. If a notice threatens to put a lien on your account or on your business, among other things, this would give cause for the TAS to get involved.
Finally, if neither of the previous criteria apply, a taxpayer can still contact the TAS if they simply receive no response from the IRS (which is very common these days). This could mean you haven’t received a notice that your refund has been processed. It could also mean you haven’t seen the refund being processed for an amended return, an originally filed return or a refund claim within anywhere from 9-12 months. When the IRS office has not granted the tax assistance you requested in the appropriate amount of time, the TAS should intervene.
When NOT to get the TAS involved
Before seeking assistance from the TAS, you must first “exhaust all reasonable efforts to obtain timely relief through normal division channels,” according to the TAS website. These “reasonable efforts” will vary depending on your needs, but they typically involve attempting to contact the IRS by phone or mail if you’re inquiring about a return or notice, respectively. The latter does tend to work better, but either method of contact could present a situation in which the TAS would need to intervene even after efforts have been exhausted—especially given the IRS’s shortage of staff to attend to these matters.
What to expect
Ultimately, taxpayers and tax professionals can expect to see improved services from the IRS over the next ten years. The Inflation Reduction Act should provide the funds needed for the agency to perform its role more efficiently, and this has potential to benefit individual taxpayers as well as the nation’s economy. But as the kinks are worked out, taxpayers should continue to look to their tax professionals for resources like the Taxpayer Advocacy Service which can help smooth the transition. Even with improved taxpayer services, this funding is primarily geared toward raising additional tax revenues through enhanced enforcement of existing tax laws and regulations. To that end, individual and business taxpayers should continue to consult with their tax advisors to ensure proper compliance and understand any audit risks they may have.
Anthony R. Scinto, CPA, is a tax partner and chair of the Tax Department at Mengel Metzger Barr & Co.