A major new climate, health care, and tax bill known as the Inflation Reduction Act was recently signed by President Biden. The $700 billion package aims to reduce the federal deficit by decreasing health and energy costs and giving the IRS a much-needed facelift.
The package includes an $80 billion annual budget increase for the IRS. This will allow the agency to dedicate more time and resources to auditing large corporations and wealthy taxpayers.
Here’s what you need to know about the increase to the IRS budget.
How Does the IRS Plan to Spend $80 billion?
The Inflation Reduction Act provides the IRS with nearly $80 billion to enhance enforcement, employment, and operations.
According to IRS data, budget cuts and decrease in staff over the past several years has led to the audit rate reaching a decade-long low. Lawmakers are hopeful a rejuvenated IRS can decrease the federal deficit by pursuing more lucrative audits and collecting billions that get lost in the “tax gap”—the difference between taxes owed to the government and those that have been paid.
The IRS plans to dedicate $45.6 billion to help strengthen its enforcement division by hiring more enforcement agents and upgrading outdated technology. These funds would also be used to improve the monitoring of cryptocurrency transactions.
With more than half of the funding going toward enforcement, the remainder of the budget will be geared toward improving taxpayer services, operations, and business systems. Taxpayers witnessed the impact that budget cuts and low staff can have on a government agency during the 2020 pandemic.
“Over the last 10 years, the IRS has steadily declined in its staffing, and this has resulted in numerous headaches for taxpayers trying to reach them,” says John Nagle, senior tax attorney at Gordon Law Group.
“With the $3 billion increase to their taxpayer services division, that will allow for a much quicker hold time and hopefully being able to get an answer resolved before you have a balance owed to the IRS.”
Still, some lawmakers think that a higher percentage of the proposed budget increase should go toward taxpayer services rather than enforcement.
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Who Will Higher Audit Rates Affect the Most?
Corporations and taxpayers earning $400,000 or more per year will be a top priority for the IRS’s enforcement efforts.
“Currently, the IRS spends about 50% of its audits on households that make $75,000 or less,” says Nagle. “The reason they do this is because households with less income are less likely to contest the audit results.”
For households making $75,000 or less, the IRS makes $10 for every $1 it spends in the collection process.
“With the additional resources, the goal is for the IRS to target high-income households, wealthier individuals; however, this may not be the actual reality for the IRS increase in funding.”