Bulletin
Investor Alert

New York Markets Close in:

Aug. 13, 2022, 10:56 a.m. EDT

The Inflation Reduction Act sends $80 billion to the IRS, but some tax experts wonder if it’s enough for the badly backlogged agency

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

or Cancel Already have a watchlist? Log In

By Andrew Keshner

For roughly a year, Jonathan Baer watched a paper folder full of tax-related paperwork slowly grow as he chronicled his effort to claim his 2020 tax refund.

The attempts included upwards of 40 phone calls to the Internal Revenue Service. Most ended without his having spoken to a person. The rare calls that did reach a person still didn’t shed light on the status of a refund for a tax return he had submitted in April 2021, he said. Baer typically files his taxes electronically but had sent in a paper return that year because he had to file certain tax schedules.

Them, this July, the “significant”-sized refund for the Bay Area–based consultant to startup businesses arrived. It had been 15 months since he turned in his tax return. “I was delighted to be able to put that file folder away,” he said.

Just as Baer is concluding his protracted tax saga, a related one is dawning on a larger scale.

Senate Democrats on Sunday passed a climate, healthcare and tax package that aims to help address the IRS’s problems. On Friday, the bill passed the House of Representatives in a 220-207 vote. Now the bill awaits President Joe Biden’s signature.

The Inflation Reduction Act calls for $80 billion in new IRS funding over a decade.

But ahead of Senate and House passage, some tax experts wondered how far the money would go toward making a difference at the backlogged and beleaguered agency — and for taxpayers like Baer who are in search of tax answers and help.

The money for the IRS — which would supplement annual congressional appropriations — is supposed to boost the number of audits of corporations and wealthy people, upgrade IRS technology, improve customer service and rebuild the staffing ranks. The agency says its full-time head count last year was almost 79,000, a roughly 13% decrease from its size in 2012. (The U.S. population increased by roughly 8% over that span.)More than half of the $80 billion will fund more audits and staff for tax code enforcement aimed at the well-off at a time when audit rates have been dropping.

But a big question from people who’ve encountered consternation among taxpayers and even tax professionals trying to deal with the IRS in recent years is how the money will get spent, and how much it will improve customer service.

According to Senate Democrats’ breakdown of the $80 billion earmark in the Inflation Reduction Act, the money — spread over its 10-year span — would be approximately carved into:

  • $45.6 billion for enforcement

  • $25.3 billion for operations support

  • $4.7 billion for business systems modernization

  • $3.1 billion for taxpayer services

But here are some other numbers to consider. In the most recent tax-filing season, in which the IRS warned of frustrations ahead, the customer-service workers answering phone calls were able to answer 2.7 million of the approximate 27 million calls placed during open hours, according to an IRS watchdog’s look at operations through March.

By early August, the IRS still had a backlog of 9.7 million unprocessed tax-year 2021 returns, the agency said. (That consists of 1.8 million returns needing corrections and “special handling,” plus 7.9 million paper returns awaiting review and processing.)

The backlog is a product of pandemic-related office closures, slow-moving manual processing of certain returns, plus the crush of extra work from three rounds of stimulus checks and six waves of child-tax-credit monthly payouts.

At the American Institute of CPAs, Edward Karl, vice president of tax policy and advocacy, doesn’t knock the importance of audits, tax enforcement and other investments.

But “given the backlog and three filing seasons of horror, heading into a fourth filing season with the backlog still not finished, is that enough money?” he said pointing to the $3.1 billion earmarked for taxpayer services. “It feels like it’s not,” he said, speaking before the Senate vote last weekend.

The IRS has put staff into “surge teams” and has been on a hiring blitz in a tight labor market in an attempt to bring in people who can help alleviate the tax-return backlog. Karl’s organization has been saying even more can be done.

For Nina Olson, the former national taxpayer advocate at the IRS, the extra money is surely good news, even if aspects like taxpayer service could stand to receive a larger share. When the bill is enacted, it’s going to be important for the IRS to lay out how it’s going to use the money and how it’s going to measure effectiveness, she said.

“Tell us how it’s going to impact me and, by the way, don’t tell me you are going to give me a chat bot,” Olson said. The IRS has been rolling out chat bots to assist taxpayers in certain situations, including some with AI capabilities that let people set up monthly installment payments on a tax bill.

But most taxpayers have very specific questions based on very specific circumstances, so it often gets to a point where they want to speak with people at the IRS, not a bot, Olson said. “They don’t want a canned answer,” she told MarketWatch.

After Friday’s House vote, Tony Reardon, national president of the National Treasury Employees Union, said the bill’s passage was “a major turning point for the IRS and all American taxpayers. Finally, after more than 10 years of growing workloads and shrinking staffs, the Inflation Reduction Act stops the slide and puts the IRS on a path toward becoming the most efficient and effective tax administration agency in the world.”

He’s previously noted that the IRS lost 8,645 customer-service representatives between 2010 and 2020.

The agency’s commissioner, Charles Rettig, wrote to members of the Senate and House earlier this month, assuring them that the extra money is “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.”

Putting aside more audits for rich households and corporations, Rettig said the funding would also go toward investments in “employees and IT systems that will allow us to better serve all taxpayers.”

Rettig has repeatedly said that the funding is critically needed. “The status quo is untenable: It’s frustrating to taxpayers, it’s frustrating to our employees and it’s frustrating to me,” he wrote in a 2021 Washington Post opinion piece . He’s said the IRS could clear the backlog by the end of this year.

Rettig, a Donald Trump pick who took the helm late in 2018, has been under scrutiny after New York Times revelations that ex–FBI director James Comey and the bureau’s former deputy director, Andrew McCabe, were both audited in the wake of messy departures from the Trump administration.

The IRS insists it doesn’t engage in politically motivated audits. Republicans expressed outrage when it was learned that the Obama-era IRS had reacted to a sudden surge in organizations including the words “Tea Party” in their names and seeking tax-exempt status by applying extra scrutiny to those groups’ applications. Then–Attorney General Eric Holder ordered a criminal investigation .

The news that $80 billion in additional funding is headed the IRS’s way over the coming decade is very good, said Janet Holtzblatt, senior fellow at the Tax Policy Center. Still, she added, there’s nothing in the proposed legislation that would stop lawmakers from doling out less to the IRS in the annual budgeting process in the knowledge that supplemental money from the Inflation Reduction Act was coming.

So far, House and Senate lawmakers on appropriation subcommittees have called for the IRS to get $13.6 billion next fiscal year, which would represent a $1 billion increase from this year.

It’s worth remembering that regular taxpayers might be getting extra help and services as a result of the money targeted to operations and modernized infrastructure, Holtzblatt and Olson said. The bill requires the IRS to explain its spending plans and provide updates at certain mile markers, Holtzblatt noted.

The IRS knows it needs to do better in engaging with taxpayers and easing their frustrations, Holtzblatt said. Besides, it’s in the agency’s interest as a tax collector to explain tax rules, she noted. “Compliance comes from minimizing both intentional errors and unintentional errors,” Holtzblatt said.

Speaking before the Senate vote, Baer acknowledged that IRS staff and officials have been trying their best under difficult circumstances. Still, his experience showed him the deep difficulties in getting easy answers to basic questions about the status of tax-refund money the government owed him and his wife. “Something is broken badly,” he said.

When Baer considers what more funding could do for the IRS, he’s trying to stay openminded. “I would love to believe that it will get better,” he said, “but I’m going to reserve judgment for now.”

Hear from Carl Icahn at the Best New Ideas in Money Festival on Sept. 21 and Sept. 22 in New York. The legendary trader will reveal his view on this year’s wild market ride. 

This Story has 0 Comments
Be the first to comment
More News In
Personal Finance

Story Conversation

Commenting FAQs »

Rates »

Partner Center

Link to MarketWatch's Slice.