Tax experts sound off on the funding the IRS will get from Congress and what it could mean for the 2023 tax season.
The IRS has about 80 billion reasons to be thankful this holiday season. That’s because President Biden signed the Inflation Reduction Act into law on Aug. 16, which includes a provision to allocate roughly $79.6 billion to the tax agency over the next 10 years—what some observers say is the largest amount of funding the IRS has received from Congress that they can remember.
In a July 31 post on her blog, “Don’t Mess With Taxes,” tax expert Kay Bell broke down how that money is expected to be distributed to the IRS over the next nine fiscal years:
- $4,750,700,000 for business systems modernization;
- $3,181,500,000 for taxpayer services;
- $25,326,400,000 for operations support; and
- $45,637,400,000 for enforcement.
The remainder of the funding will go to the U.S. Tax Court, the Treasury Inspector General for Tax Administration, and the Treasury Department’s Office of Tax Policy.
Treasury Secretary Janet Yellen asked the IRS in late August to produce a six-month plan detailing exactly how the new resources will be deployed over the next decade.
“Treasury is going to be keeping a close eye on it because the agency has to succeed here, and we need to see something in this plan that instills confidence that the agency in fact has a plan, that it’s a reasonable one, and that it’s achievable. Here’s where we’re going, here’s how we’re getting there, and here are some intermediate milestones. This infusion of money is significant, and I think the stakes are so high that Treasury has to be involved,” Robert Kerr, principal at Kerr Consulting, said during an appearance on the “This Week on Tax Notes Talk” podcast on Sept. 13.
The problem is, we do not know who is going to be leading the IRS six months from now. Charles Rettig’s term as IRS commissioner expired on Nov. 12, and the new chief will have to jump right in and figure out a plan for the windfall the IRS will receive. Biden nominated Daniel Werfel, a former acting commissioner of the IRS during the Obama administration and the current global leader of the Public Sector practice at Boston Consulting Group, as the next IRS commissioner but that is pending confirmation by the Senate. Until then, IRS Deputy Commissioner Douglas O’Donnell will serve as acting commissioner.
So, what is next for the IRS? It is a question some tax experts tried to answer on a variety of podcasts recently and what this increase in the IRS’s annual budget could mean for the upcoming tax season.
Hiring to fill many needs
According to an August Bloomberg report, the IRS has lost more than 23,000 employees since 2010—to 80,000 at the height of tax season this year—and it is estimated that the tax agency is going to lose approximately 50,000 more in the next five years due to retirement.
“We all know they’re behind [on hiring], and that’s part of the cause [for this funding],” Misty Erickson, a tax specialist at the National Association of Tax Professionals (NATP) and a former auditor for the state of Minnesota, said during an NATP podcast on Sept. 1.
But those retiring IRS employees are not what has made national headlines. What has are claims by some Republican lawmakers that the IRS will use the new federal funding to hire 87,000 “agents” in an effort to increase audits of the middle class—both of which are not true, the IRS has said. The IRS and Democrats have attempted to reassure Americans that the additional audit activity will affect only those making $400,000 or more.
“Eighty-seven thousand agents aren’t going to show up on the IRS’s doorstep the day the Inflation Reduction Act is signed. I don’t think you’ll be able to find 87,000 people who have the base level of competency required [that quickly],” Ed Zollars, CPA, an instructor at Kaplan Financial Education, said on the Current Federal Tax Developments podcast on Aug. 14. “It’s going to take quite a bit of time to ramp that up. I don’t think I’m currently worried about the IRS knocking down the door of my client’s offices anytime soon.”
So where did that 87,000 number come from? According to a September blog post, Jesse LaGrossa, manager of the business valuation, forensic, and litigation support services at Marcum, wrote that The American Families Plan Tax Compliance Agenda published by the Treasury Department in May 2021 included a proposed IRS funding plan for the next 10 years. Page 16 of that report includes a proposal for funds of approximately $79.2 billion—very close to the $79.6 billion allocated in the Inflation Reduction Act. Table 3 on page 16 indicates that such an allocation of funds would allow the IRS to hire an estimated 86,852 full-time equivalent (FTE) employees (approximately 87,000) over the next decade.
“Did Congress appropriate more federal funds to the IRS than in recent years? Yes. Those funds will presumably be used to hire additional staff at all levels, including revenue agents, revenue officers, special agents, and other professional staff—not just ‘agents,’” he wrote. “While some of the estimated 86,852 FTE employees budgeted for will replenish staffing attrition due to retirement, career changes, etc., the hiring of approximately 87,000 FTE employees over a 10-year period can be construed as a significant expansion of the IRS.”
The problem the IRS will face is the same problem anyone in business today who is hiring is facing right now: it is tough to find the right people, Mark Everson, former IRS commissioner and current vice chairman at Alliantgroup, said during an appearance on the “This Week on Tax Notes Talk” podcast on Nov. 1.
“We have a shortage of workers right now for a variety of reasons, and I think that’s very true across accounting and tax in the private sector. It’s also of course true for the IRS. They’ve struggled to bring on people that they had the authority to bring on with the COVID-19 relief funds,” he said.
Fortunately for the IRS, the agency was given direct-hire authority, allowing it to quickly fill vacant positions, even offering jobs to qualified people on the spot. On Oct. 27, the IRS announced it has hired 4,000 new customer service representatives to answer phones and provide other services for the 2023 filing season. These new staffers were hired over the past several months and are being trained to provide assistance to taxpayers, including answering phone questions.
That’s good—for both taxpayers and tax professionals—as hold times to get a question answered by an IRS representative have averaged 23 minutes. And that is if your calls to the IRS get answered—of the 282 million telephone calls the agency received in 2021, approximately 32 million, or 11%, were answered.
With the addition of these 4,000 customer service representatives, the IRS anticipates phones will be answered at a much higher pace during the 2023 filing season.
“It absolutely should be a goal that whether it’s through phones or other forms of communication that, if people need to communicate with the IRS, they can do that efficiently, they can do that quickly, and they can get the right answer,” former IRS Commissioner Charles Rossotti said during the recent AICPA National Tax Conference in Washington, DC, according to the Journal of Accountancy. “That is going to be a step-by-step process … and within a few years, it should be massively better than it is today.”
Clearing the paper return backlog
Last May, National Taxpayer Advocate Erin Collins revealed in her midyear report to Congress that the IRS had a backlog of 21.3 million unprocessed paper tax returns, an increase of 1.3 million over the same time last year, which she said is “creating unprecedented financial difficulties for millions of taxpayers and outright hardships for many” who were counting on refunds to supplement their incomes.
She also said there were eight-month backlogs in processing taxpayer correspondence.
When asked on the podcast what his top priorities would be if he was the current IRS commissioner, Everson said one of the first things he’d want to do is “absolutely have to clear the backlogs, and that includes the correspondence.”
“Because as practitioners know, there have been lots of notices issued. People are confused. Until you clear the backlogs, including the correspondence, you’re still going to have untold volumes of people calling in because they don’t know what’s happening. You have to get that all corrected and fast,” he continued. “They’ve done a good job of getting extra people to work who’ve done submissions processing in the past. But I would assign tag teams or teams of regular auditors and collections people, ship them out to the service processing centers, and have them work on two- to three-week rotating duties, if you will. Let go of some of the other things that they’re doing, which are discretionary. They have to get this backlog cleared.”
The good news is some progress has been made, Collins said in a Nov. 10 blog post. She wrote, “As of Oct. 21, the IRS had about 3 million individual returns and north of 4 million business returns awaiting initial processing, as well as about 2 million amended individual and business returns.”
She added that the IRS deployed additional resources to address the processing backlog and has been processing between 900,000 to 1.1 million total individual and business returns a week. However, the IRS only has about a month or so left before it shuts down its systems to prepare them for the upcoming filing season.
The IRS also has about 4.5 million pieces of correspondence awaiting processing, Collins said, adding “many of these documents are scheduled to be worked by the customer service representatives who split their time during the filing season between answering phones and processing amended returns and correspondence.”
Reinforcing (and modernizing) the agency’s infrastructure
During a recent Yahoo Finance segment on the funding the IRS will receive from the Inflation Reduction Act, senior columnist Rick Newman described the current state of the IRS’s computer systems as, “The IRS has computers from the 1960s. They have equipment that is made by companies that are out of business. So, there’s nobody to service this stuff. They have computers running on Windows XP. No one has that in their house anymore. So, they desperately need some new technology, and people to build that technology. And it’s going to take a long time. I mean, we’re talking about investment over a decade.”
Bringing the IRS’s antiquated systems into the 21st century will include things like the development of callback technology, along with other techniques that can provide “a more personalized customer service,” Kay Bell wrote.
In previous years, the IRS has had a “woe is me” mentality, Everson said, and has told Congress and taxpayers that “we can’t do anything because we don’t have enough money.” The agency can’t use that excuse anymore.
“One of the things they really need to do here is to communicate openly and regularly with the stakeholders about what they’re doing and why certain things will take time before you’ll see certain improvements. That’s what they have to do because the expectations are higher,” he added.
The former IRS commissioner also said the tax agency has a problem with data security, most recently when it said last September that it mistakenly published confidential data for 120,000 taxpayers on its website before realizing the error and taking down the data. He also pointed to the ProPublica report last year in which tax information of well-known billionaires like Jeff Bezos, Elon Musk, and Warren Buffett was leaked to the news outlet. The source(s) of the leak has not been revealed.
“Data security is a terrible problem, and it’s a great concern to everybody,” Everson said. “Before they spend these billions of dollars on new systems, I think the American people and Congress are entitled to an explanation of what happened with the ProPublica leak. Was it inside? Was it contractors? They’re going to go out and have a lot more contractors doing many, many things. We better understand that they’re doing it right.”
He also stressed that the new IRS commissioner must make overseeing the development of this six-month implementation plan and building up the agency’s infrastructure while maintaining the operations an important part of his to-do list.
“If you build up the infrastructure side, this plan will unfold with a lot fewer problems,” Everson said.
Robert Kerr said there is a lot riding on this “once-in-a-generation opportunity for the agency to modernize and to meet the expectations and needs of taxpayers.”
“Failure is not an option here; it simply has to succeed,” he added. “Frankly, it’s in everyone’s interest that the agency does. It’s in the taxpayer’s interest; it’s in the industry’s interest; it’s in the tax professional interest. We should all be rooting for and doing everything we can to help.”