The race to pass the Inflation Reduction Act (H.R. 5376) is on, and while there’s plenty at stake for some corporate taxpayers, and those in the energy space in particular, the financial stakes are also high for the IRS.
There is almost $80 billion in appropriations for the IRS to put toward taxpayer services and enforcement specified in the bill, nearly all of which would be available until 2031.
To contextualize the proposed appropriations amount, the IRS had actual expenditures of $13.7 billion in fiscal 2021. That included supplemental funding so that the agency could handle COVID-19-related expenses.
An increase that averages out to roughly $8.9 billion per year would represent a significant boost to the agency’s budget. However, the relative bounty for the IRS in H.R. 5376 comes with some congressional direction.
Part 3 of H.R. 5376 spells out the specific allocations to the IRS to enhance the agency’s resources and improve compliance efforts. The breakdown is as follows:
- Taxpayer services: $3,181,500,000;
- Enforcement: $45,637,400,000;
- Operations support: $25,326,400,000;
- Business systems modernization: $4,750,700,000;
- Task force to design free, direct e-file system: $15,000,000;
- Treasury Inspector General for Tax Administration: $403,000,000;
- Treasury Office of Tax Policy: $104,533,803;
- Tax Court: $153,000,000; and
- Treasury departmental offices for oversight and implementation support to help the IRS implement the IRA: $50,000,000.
Enforcement is the biggest line item, and it’s the one that H.R. 5376’s drafters hope will help support the revenue estimate of $124 billion in increased collections over the 10-year budget window.
The bill is fairly vague on expectations for the IRS’s spending with the increased enforcement budget. It lists “necessary expenses for tax enforcement activities,” as well as legal and litigation support and enforcement of criminal statutes regarding tax law violations.
The bill also specifies “digital asset monitoring and compliance activities” and investigative technology for use in criminal investigations as items on which the IRS should spend the money.
The IRS has been working on digital asset compliance for years, but an infusion of funds could allow the agency to rather significantly step up its efforts, as well as its criminal investigations.
The IRS explained in a March fact sheet that “today [the IRS Criminal Investigation division] currently devotes only about six percent of its investigative time to cybercrimes/crypto currency, so it is just scratching the surface of the amount of criminal activity that is being detected.”
The next largest proposed line item is for operations support, which encompasses all the mundane elements of running a big federal agency, like rent, facilities costs, and vehicles, that generally don’t affect taxpayers directly.
But H.R. 5376 specifies that the IRS can use this allocated amount for “information technology development, enhancement, operations, maintenance, and security.”
The IRS’s technological woes are well documented and can have concrete effects on taxpayers, so this dedicated amount should help ameliorate some of those deficiencies.
The item for business systems modernization could have a similar salutary effect on customer service because the bill stipulates that it must be spent on “technology to provide a more personalized customer service,” and not used for the operation and maintenance of legacy systems.
Most of the items on which H.R. 5376 instructs the IRS to spend its allocations give the agency until 2031 to incur the expense. Not so the allocation for a task force on developing an IRS-run free, direct e-file tax return system.
Under the bill, the IRS has nine months to set up a task force to produce a report on how it would create and operate a free, direct e-file system, including what the system would cost to administer. The details of what would be included in the system will presumably be part of the report, and those details will matter.
One item that H.R. 5376 contemplates is “differential coverage based on taxpayer adjusted gross income and return complexity.” Part of the report would feature “taxpayer opinions, exceptions, and level of trust, based on surveys, for such a free direct efile system,” so there would be some consultation of taxpayers before any changes are implemented.
That’s appropriate because, depending on its particulars, an IRS-run direct e-file system could represent a significant change in the relationship between taxpayers and the tax system. The H.R. 5376-authorized study would be a major development for tax administration, but it’s not a novel idea — it was included in last year’s Build Back Better Act.