How Increased IRS Funding Will Affect Middle- and Low-Income Americans | Taxes

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The Cut Inflation Act included $80 billion in funding for the Internal Revenue Service and sparked a storm of speculation that the tax agency would step up audits and even start sending armed officers into the field to collect tax bills.

However, tax experts say internet rumors surrounding the bill range from misleading to outright untrue. In fact, some argue that a cash injection into the IRS will actually benefit low- and middle-income taxpayers who have experienced long delays in processing paper returns and correspondence.

“This will help taxpayers have a better customer service experience,” says Miri Forster, national tax controversy practice leader for accounting firm Eisner Advisory Group LLC.

Not everyone is convinced there won’t be a hike in audits for middle-income families, but experts agree the IRS needed to increase its funding and that’s not bad news for taxpayers.

An underfunded agency

While the $80 billion allocation to the IRS may have surprised some members of the general public, those working in the tax industry say it is long overdue.

“They’ve been slowly falling apart for years,” says Bill Smith, national director of tax technical services for CBIZ MHM’s national tax office. He notes that IRS staffing levels are lower than they were in 2010, which has resulted in long delays in processing documents. “The matching is just ridiculously slow,” Smith says.

In fiscal year 2019, the number of full-time workers for the IRS was 73,554, a decrease of 22% from its workforce in fiscal year 2010, according to the Taxpayer Advocate Service, an independent organization. within the IRS. During this period, the agency’s budget was also reduced by 20.4% after adjusting for inflation.

“The IRS has been underfunded for years and many of its employees are nearing retirement,” Forster says.

However, not everyone sees the influx of money as just a way to bring employment and funding back to previous levels. Scott Curley, CEO and partner of FinishLine Tax Solutions, believes the decision to increase IRS funding is at least partly related to rising inflation rates and increased government spending on aid. distributed during the pandemic.

“It created a situation for us,” Curley says. To pay for pandemic-related expenses, he says the government had two choices: “Do we want to raise taxes more or do we want to go get the money we are owed already? With the passing of additional funds for the IRS, Curley believes the government’s response was the last.

How IRS Funding Will Be Used

As part of the Cut Inflation Act, the $80 billion in additional funding for the IRS was split into four categories:

  • App: $45.6 billion
  • Operations support: $25.3 billion
  • Enterprise system modernization: $4.8 billion
  • Taxpayer Services: $3.2 billion

This money can be spread over a ten-year period ending in fiscal year 2031.
“We don’t know yet how they’re going to spend the money,” Smith said. He adds that some expect a new IRS commissioner to be appointed this fall, and any decision on how the money will be spent will likely wait until after the appointment.

Among tax practitioners, the hope is that at least some of the money will go towards updating IRS systems and improving response times. In September 2022, the IRS said it had yet to process 7.2 million individual tax returns, which includes both 2021 returns and late returns from the previous year.

“Anything filed on paper goes in an Armageddon basket,” Smith says. But it’s not just a bigger workforce that’s needed to process returns and bring the agency up to speed. “They have horribly outdated computer systems,” according to Smith.

With more than half of the new funding earmarked for law enforcement, many are wondering if this means more audits will take place. “The short answer is that it’s an absolute certainty,” Curley says.

The problem, however, is who might be the recipient of these audits. The IRS insists it won’t target low- or middle-income households, but Curley says the law doesn’t change the underlying rules guiding an automated system that flags returns for potential audit. According to Curley, this could mean that, despite assurances from the IRS, some of these audits could be directed at middle-income households.

Hiring 87,000 IRS agents unlikely

Fanning the flames of concerns over audits is the claim that the IRS will add 87,000 enforcement officers. “The general design is that the IRS is going to double in size, but that’s a little misleading,” Curley says.

The 87,000 figure comes from a 2021 Treasury Department report that estimated that increased IRS revenue could fund an additional 86,852 workers by 2031. Smith points out that the report was just one suggestion on how the money could be used and that these workers will not necessarily be. be enforcement agents. This number could include people in roles such as computer programming or customer service.

The IRS has repeatedly said that any increase in enforcement efforts will target those with higher incomes. The 2021 report states that “(verification) rates will not increase from past years for those earning less than $400,000 in actual income.”

In addition to high earners, Forster says she expects international and partnership returns to come under increased scrutiny in the coming years.

Conclusion for low- and middle-income taxpayers

Exactly how the increased IRS funding will affect low- and middle-income families remains to be seen, but some predict the net effect will benefit those in lower tax brackets.

“The IRS funding includes a free electronic file system funding plan,” Forster says. This could benefit all taxpayers who file their own returns.

Additional workers can also mean a more responsive SRI. In fiscal year 2020, the IRS received 100.5 million calls but was only able to answer 24% of them, according to the Taxpayer Advocate Service. The organization argues that more money will mean a better experience for those who need IRS customer service.

Still, not everyone thinks all the changes will be positive. Curley worries that some middle-class families may end up being targeted for enforcement. “Solid midfielders are the ones that will be hit the hardest,” he predicted.

Smith, on the other hand, doesn’t think low- and middle-income taxpayers need worry. “The audit rates are extremely low for taxpayers in this income bracket,” he says. “(They are) infinitely small.”

Experts predict the IRS will finalize its spending plan by early 2023.

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