A large-scale refurbishment of the Internal Revenue Service (IRS) is underway following an allotment of $80 billion to the agency in Democrats’ Inflation Reduction Act passed last year.
The Treasury Department released an operating plan Thursday for its new budget, which will be spent over the course of the next decade and involve hiring tens of thousands of new employees, upgrading technology, and expanding its data and analytics capabilities.
Restoring a depleted IRS staff
Most of those new hires will be taxpayer service workers to help answer the phone and auditors to collect money from taxpayers and businesses that underreport their income.
The IRS expects to hire more than 7,000 service reps and 1,500 auditors this year with the new money, according to the plan.
IRS Commissioner Danny Werfel said Thursday on a call with reporters that the agency had already hired 5,000 service representatives who had answered 1 million more calls than last filing season and reduced average wait times by about four minutes.
In the first half of the IRS’s 10-year plan, taxpayers will be able to file documents and respond to notices online as well as download their account information, the Treasury said.
“For the first time, the IRS will also help taxpayers identify potential mistakes before filing, quickly fix errors that delay their refunds, and more easily claim the credits and deductions they are eligible for,” the Treasury said.
Next year, the agency expects to hire 6,400 service representatives, 7,200 auditors, 3,800 operations staff and 200 technology specialists. When the Treasury asked for the $80 billion in 2021, it projected the total number of new hires at the IRS to be around 87,000.
Currently, IRS staffing levels are 20 percent lower than they were in 2010.
Cracking down on tax evasion
Werfel repeated a pledge from Treasury Secretary Janet Yellen that new auditors and enforcement initiatives at the IRS would be focused “exclusively” on wealthy people, partnerships and corporations, though he said this would be true in the “initial” phase of implementation.
Yellen ordered the IRS not to increase audit rates for taxpayers earning less than $400,000 a year, though that requirement was not expressly included in the Inflation Reduction Act.
“It makes sense to focus our initial Inflation Reduction Act implementation efforts exclusively on increasing our capacity to assess compliance of high-income and high-wealth individuals, complex partnerships and large corporations,” Werfel said.
“During this time, the audit rate for average taxpayers will not be increasing and as a result we will not come close to hitting or exceeding any historic average rate. People who get W2s or Social Security payments or have a small business should not be worried about some new wave of IRS audits,” he said.
Some tax pros wonder whether the Biden administration will be able to deliver on these promises for administrative reasons.
“That’s a real challenge — first to determine who is safe from the pledge without actually doing an audit to determine if their true (actual) income is below $400,000 and then second, to determine the appropriate ‘historical’ audit rate to apply to taxpayers with income below $400,000. Treasury and the IRS say that a plan for implementation of that enforcement plan will be provided ‘soon’ without defining ‘soon,’” Janet Holtzblatt of the Urban-Brookings Tax Policy Center wrote in an analysis.
Closing the tax gap
The IRS isn’t able to collect about $600 billion in taxes that are owed to it every year, an amount known as the “tax gap.” The tax gap was roughly equal to 2.8 percent of U.S. gross domestic product (GDP) in 2019, according to a calculation by The Hill.
The last time it was definitively measured for the years 2014 to 2016, the largest chunk of the tax gap was in individual business income, representing $130 billion or about 30 percent of the total amount of uncollected tax. Those businesses usually have legal designations as partnerships, LLCs or S-corporations.
Wages and workers are fully taxed in the U.S. at 99 percent compliance, according to the Treasury, while other sources of income typically earned by rich people and business owners are far less compliant.
The IRS is able to collect due taxes on 82 percent of capitol gains incomes, 43 percent of nonfarm business income and 36 percent of farm income. This distinction between how the government treats workers and business owners has been coined by Secretary Yellen as the “two-tiered tax system,” which she has described as unfair.
Boosting data and analysis
Another aspect of the plan spells out new data and analytics capabilities for the IRS that will put taxpayer information into a more centralized and easily accessible system for tax authorities. Werfel’s background as a consultant and business operations specialist plays into this broad structural redesign of IRS operations, tax experts have noted.
The plan will “establish a centralized function for compliance planning and strategy [and] create a centralized compliance-planning function to set strategic compliance priorities and route select cases for compliance treatments.”
Rather than relying on historical informational structures at the IRS, the agency will “build a unified compliance organization that enhances centralized case-planning and strategy and enables us to refine business processes.”
Some voices in the tax world are worried about how much more power over taxpayers the new data and analytics systems could give the IRS.
“The service needs to proceed deliberately but very carefully in terms of the data analytics, because it has now a great deal of information already on Americans and American businesses, but it’s not collected and used together in a way that makes it as useful as it might be,” former IRS commissioner and Alliant Group tax consultant Mark Everson said in an interview with The Hill.
“What this initiative will do over the coming years is make that analysis much more sophisticated. You’ve got to be careful,” Everson said.
One way such a power could be abused is by treating certain segments of the population differently from others along racial or gender lines in terms of tax administration. A recent Stanford University study found that Black Americans can be 4.7 times more likely to be audited than non-Black people, a disparity associated with claiming the earned income tax credit (EITC) for low earners.
“Behind the people doing the audits are people who have unconscious bias, so we have to wake people up,” Alice Thomas, an associate professor of law at Howard University, told The Hill in an interview.
“Do you understand that it causes depression? That it has a psychological impact, mania, physical ailments? Black people are physically ill and mentally ill as a result of unconscious bias and racism,” she said.
Werfel noted on Thursday that spirits at the IRS are high now and that the agency is excited to put its new funding to use. Many in the tax world say the stakes for both for Werfel and the country are high.
“This is the only thing in our entire system that every single one of us has to deal with every year. We can’t fire them, we can’t opt out, we can’t hire somebody else,” former IRS commissioner and tax attorney Fred Goldberg said in an interview.
“Please make it work right,” he said.