What an Increased IRS Budget in 2022 Could Mean for You

 In IRS Problems, Tax Planning

Let’s be honest—most taxpayers do not want to pay higher taxes. However, recent polls show that Americans want the government to do more, such as implementing long-overdue improvements to infrastructure (i.e., roads, bridges, and water systems), providing a living wage to federal employees/contractors, improving our immigration process, establishing better security at our borders, and ensuring that all Americans have access to health care. These programs come with high price tags, and a majority of our congress members are against raising taxes for C Corporations and individuals who are considered “wealthy” to pay for these items. The other way to fund these programs is for the government to collect more money from taxpayers via enforcement, using rules and tax rates that are already in place.  To do this they need an increased IRS budget in 2022.

The House Appropriations Committee has recently released a bill that would increase the IRS’s budget by $13.6 billion in 2022, which is more than a 14% increase over the current spending budget.

What is Enforcement?

Enforcement is the IRS function that ensures that taxpayers comply with the Internal Revenue Code, which generally takes place through the IRS issuing tax notices, conducting examinations/audits, and facilitating collections of past-due tax debt. Each year, billions of dollars in legally owed taxes go uncollected by the IRS. According to Former IRS Commissioner Charles Rossotti, $574 billion in taxes went uncollected in 2019, and research indicates that the estimate could be as high as $1 trillion for that year. 2019 was not an anomaly, as this “Tax Gap” (as it is known) is a regular occurrence each tax year.

How Does an Increased IRS Budget in 2022 Raise Money for the Government?

Believe it or not, research has shown that for every additional $1 directed to the IRS, tax revenue increases on average by about $4. Many tax policy experts look at an increased IRS budget as an investment. Here are some ways that an increased IRS budget results in higher revenue for the federal government.

More Taxpayer Assistance

Have you tried calling the IRS lately? Were you able to get a person on the line, and if so, did it take more than an hour to be connected? According to a recent study, only 1 in 4 taxpayers got an answer to their phone call to the IRS in 2020. The increased IRS budget for 2022 includes funding to hire additional agents to provide better phone support and to reopen many of the in-person taxpayer assistance centers that were shuttered during the Covid-19 pandemic. More taxpayer assistance results in taxpayers filing more accurate returns, which results in more revenue for the IRS and reduces the IRS’s need to issue notices and resort to enforcement measures.

Increased IT Capabilities

The IRS has made significant investments in IT over recent years, but more needs to be done to modernize the IRS’s IT systems. The IRS aims to substantially improve its systems to enable better tracking and auditing of taxpayers who do not pay their fair share. Increased IT capabilities will allow the IRS to process returns faster, better identify returns that involve identity theft, improve security for taxpayer data, and more readily identify problematic returns. Better IT capabilities make the IRS more efficient, reduces the payment of fraudulent tax refunds, and enable it to issue refunds faster.

Hiring More Educated and Experienced Agents

Over the years, the number of millionaires and large corporations subjected to audits has decreased due to the lack of qualified agents possessing the knowledge and experience to facilitate those audits. The increased budget aims to recruit, pay, and train more qualified personnel to improve collections from sophisticated taxpayers.

What Could the Increased IRS Budget Mean for You?

Because my clients are typically small business owners, none of my clients are likely to be subject to the changes that affect large corporations (unless their businesses grow in future years). However, I do have some clients who are considered to be “high income” taxpayers, which is defined in the Biden Tax plan as having an income of $400,000 or more. But in general, most of my clients do not fall into either category. Here is what the increased IRS Budget for 2022, if implemented, is likely to mean for the typical small business taxpayer:

  • Better ability to get taxpayer questions answered by the IRS via phone using the taxpayer hotline or in-person at an IRS service center.
  • Tax notices are likely to be issued more quickly and become more prevalent for taxpayers who omit information from a filed return(s), report information inaccurately, or fail to file a return(s).
  • Problematic returns are likely to be identified more quickly with improved IT systems, which will result in additional Automated Underreporter (AUR) notices being sent to taxpayers of all income levels.
  • Taxpayers with past-due tax debt are likely to experience more aggressive collections and/or have a revenue officer assigned to their case.
  • Tax returns will likely be processed more quickly by the IRS, which should result in the more efficient processing of refunds.
  • Responses from taxpayers regarding notices issued to them are likely to be addressed and resolved by IRS representatives more quickly, either resulting in a no-change letter to the taxpayer or the additional assessment of tax.

So, to sum it up, the increased IRS budget from a taxpayer perspective will have both positive and negative effects. But with a four-fold return on its investment, the increased IRS budget is likely to pass congress as it does not result in “raising taxes” on anyone. Rather, the increased IRS budget is more concerned about raising revenue by receiving each taxpayer’s “fair share” based on laws/tax rates that are already on the books. With the increased appropriation, taxpayers should be increasingly concerned about keeping accurate books, submitting accurate returns, and conducting tax planning to find legal ways to reduce taxes such that their “fair share” is just that—fair.

If you believe you might be a target for IRS enforcement or would like to determine whether there are legal ways to reduce your tax burden, I would be happy to discuss this with you! Please contact me using the form below.

 

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