The plan to starve the beast might not go quite as expected. The latest parry in the skirmish over the IRS’s expanded funding in the Inflation Reduction Act (IRA, P.L. 117-169) would rescind the bulk of the appropriated amounts.
But a better approach would be for Congress to be more precise about what exactly it wants the IRS to do with added funds every time it doles them out, however much the agency ultimately receives. And recently Congress has at least made some efforts at insisting on transparency, even if they are tardy.
House Ways and Means Committee member Adrian Smith, R-Neb., and Rep. Michelle Steel, R-Calif., along with 48 cosponsors, recently introduced the very brief Family and Small Business Taxpayer Protection Act. The bill would renege on any unobligated balances appropriated in the IRA for the IRS in these categories:
- $45.6 billion for enforcement;
- $25.3 billion for operations support;
- $15 million for a task force to design an IRS-run direct e-file system;
- $403 million for the Treasury Inspector General for Tax Administration;
- $104.5 million for the Office of Tax Policy;
- $153 million for the Tax Court; and
- $50 million for departmental offices at Treasury to implement the IRA.
The amounts appropriated for taxpayer services and business systems modernization — $3.2 billion and $4.8 billion, respectively — would remain.
The IRA explained that the amount for taxpayer services was supposed to include pre-filing assistance and education, filing and account services, taxpayer advocacy services, and the hiring of temporary contractors and consultants.
Business systems modernization is slated to include developing callback technology and “other technology to provide a more personalized customer service but not including the operation and maintenance of legacy systems.”
Congress wanted the IRS to include these specific items on the presumably much bigger list of expenses that would be covered by those two categories. Even if the total appropriations are trimmed significantly, there is plenty of room for other types of expenditures within the categories.
That’s why the calls for a detailed spending plan are a good idea, even if the IRS winds up with only a small part of the $80 billion it was promised in the IRA. A requirement for the agency to report to Congress what it intends to do with the money should have been part of the new law.
Treasury Secretary Janet Yellen has promised that the IRS will issue a detailed plan for the new appropriations by February, and there appears to be bipartisan support for pre-expenditure accounting. But members on opposite sides of the aisle have somewhat different expectations.
In an October 4 letter to Yellen and IRS Commissioner Charles Rettig, Senate Finance Committee Chair Ron Wyden, D-Ore., asked the IRS to prioritize spending on taxpayer services and technology, with a goal of improving both service and enforcement, as well as to report back on whether and when it will implement his recommendations.
WASHINGTON, DC – MAY 12: Sen. Ron Wyden (D-OR) speaks during a news conference about the proposed … [+]
He also asked the agency to “hire enough revenue agents to audit wealthy taxpayers (including passthroughs) at a significantly higher rate than EITC [earned income tax credit] claimants” and vowed to continue working on giving the IRS the authority to make direct hires.
Wyden said the IRS has failed to enforce the Foreign Account Tax Compliance Act and told Rettig that he expects new funds to be used to monitor the reporting of offshore accounts belonging to U.S. persons. He also said that because of the 25% decline in IRS Criminal Investigation division special agents since 2010, he wanted to see new funding used to hire more agents to investigate high-income tax evaders.
On the technology front, Wyden explained that he wanted the IRS to make system upgrades to enable it to use information from third parties — such as information about passthrough income, capital gains, credit card receipts, and foreign assets — that he said it hasn’t been able to use.
On the other side are the Senate Finance Committee Republicans, who also sent a letter to Rettig asking for details about the planned spending.
Their first request concerned ways the IRS should prioritize taxpayer service, starting with clearing the backlog of returns. They, too, want the IRS to spend its money for new technology wisely.
The Republicans criticized the IRS’s integrated modernization business plan, which was developed in 2019, as “providing loose sketches” of what the agency wants to use its money on. They sought “refinement and clear articulation of metrics and milestones that independent overseers can objectively use for monitoring any IRS IT and/or business plan modernization.” That is a reasonable request.
The Senate Republicans emphasized the need to avoid “biased targeting” and protect taxpayers’ privacy. They want to prevent targeting based on “political beliefs, religion, or party affiliation.” They asked the IRS to explain how it would implement the directive from Yellen not to use the added appropriations to increase audits for households earning $400,000 or less or small businesses.
On privacy, they have it half right: Although they say the IRS should ensure that there are “effective audit trails that monitor IRS employee use of confidential taxpayer information,” the agency also uses outside contractors to collect sensitive personally identifiable information, as it did when administering the 2021 advance child tax credit. And those contractors need effective and transparent audit trails for any identifying taxpayer information they’re handling, too.
If the IRS ends up getting only a fraction of the appropriation in the IRA, it could be even more likely to turn to contractors to implement technological updates.
One question the Republicans asked is notable: What are the estimates of return on investment for planned spending? They asked the IRS to provide its current estimates of the return on investment for increased auditing or enforcement in 12 different areas.
Those include nonfiling taxpayers, cash economy tax evasion, the gig economy, COVID-19-relief fraud and improper payments, FATCA enforcement, EITCs, American opportunity tax credits, low-income housing tax credits, net premium tax credits, child tax credits, sick and paid family leave tax credits, and employee retention tax credits.
There might not be an easy way to answer that request, but the underlying point is that Congress ought to know how the IRS is prioritizing its resources.
The push to have a detailed plan for how the IRS intends to spend the infusion of funds from the IRA, even if that amount ends up being trimmed soon, is a positive step.
The agency will have to spend extra time and resources preparing a plan that can be widely shared with Congress and taxpayers, but that should be time well spent if it gives taxpayers more confidence in the tax system overall and the tax administrator in particular.