As the 2024 tax filing season begins, the IRS continues to build on the improvements made possible by the infusion of funds from the Inflation Reduction Act. The added support reversed more than a decade of disinvestment in tax administration and enforcement by appropriating $80 billion to modernize the IRS over 10 years. The infusion of long-term funding allows the IRS to invest in new technology and the staff needed to rebuild the agency, improve customer service, and ensure that the nation’s tax laws are enforced effectively.
However, the Republican majority in the U.S. House of Representatives has made repealing the infusion of funds a major priority. They have voted to rescind the full unused portion of the additional funding on a party-line vote and clawed back $21.4 billion as part of the June 2023 agreement to avert default and raise the debt limit. House Republican appropriators initially sought to rescind $67 billion from the funds provided to the IRS, but a deal reached in January made what was originally proposed as a two-year cut a single-year reduction instead.
In April of 2023, the IRS issued a strategic operating plan outlining its ambitious goals for the use of the funds. Additional funding reductions would prevent the achievement of these goals and would exacerbate efforts to close the tax gap, limit the IRS’ ability to ensure the wealthy and large corporations pay what they owe, and reverse efforts to improve service for all tax filers. This column reviews both the progress made by the IRS toward modernization in the first year after the Inflation Reduction Act’s enactment as well as major initiatives currently underway.
Improving customer service
Since the enactment of the Inflation Reduction Act, the IRS has implemented a number of initiatives aimed at improving customer service. These efforts helped dramatically improve customer service, leading to an 87 percent level of telephone service for the 2023 filing season, up from 18 percent in the prior year. Similarly, telephone wait times dropped from 27 minutes in 2022 to just 4 minutes in 2023. Efforts to improve service ranged from reopening or adding 35 taxpayer assistance centers (TACs) to opening centers on Saturdays during the 2023 tax filing season. These centers provide face-to-face help on basic tax law and questions regarding individual accounts. By expanding access, the IRS was able to provide in-person service to 100,000 more tax filers in 2023 than in the prior year. By January 2024, 54 TACs had been opened or reopened using funding from the Inflation Reduction Act. Other improvements on tap for 2024 include expanding access to “paperless processing,” which will allow filers to request information and respond to correspondence online, and offering “pop-up” TACs in hard-to-reach communities.
Creating a no-cost public option for tax filing
The IRS will inaugurate Direct File in 2024, a no-cost public option for tax filing. Eligible individuals with relatively simple returns who live in 12 states—Arizona, California, Massachusetts, and New York, along with eight states with no state income tax—will be able to directly file their 2023 federal tax returns online with the IRS for free. If successful, the pilot will be extended to more states in future years.
The IRS pilot will be “mobile friendly”—allowing filers to prepare their return on a laptop, tablet, or smart phone—and will be available with real-time online support in both English and Spanish. A public Direct File option will save filers money; the average taxpayer currently spends $270 preparing their federal return. It can also help ensure that filers access all tax credits and refunds they are entitled to. Members of the House Republican caucus and their allies in the software industry have fought hard to block a public option, despite broad-based, bipartisan public support.
Collecting taxes owed by the very wealthy
Repeated funding cuts since 2010 hindered the ability of the IRS to go toe-to-toe with wealthy tax avoiders who used sophisticated tools and planning strategies to avoid paying the taxes that they owed. Inflation Reduction Act-supported efforts to boost compliance by wealthy individuals with incomes in excess of $1 million owing more than $250,000 in tax debt have already resulted in the collection of $520 million in previously unpaid taxes since the enactment of the Inflation Reduction Act. This amount includes $15 million in restitution from one individual who claimed millions of dollars of business expense deductions to finance construction of a 51,000-square-foot mansion, a swimming pool, and tennis and bocce ball courts. Another individual fraudulently obtained $5 million in COVID-19 relief loans and used the proceeds to buy luxury automobiles.
Recent research by economists at Harvard University and the U.S. Department of the Treasury documents the cost-effectiveness of money spent auditing high-income households. The study found that each dollar spent auditing tax filers in the top 1 percent of the income distribution generates $4.25 in revenue, a figure that rises to $6.29 for those in the top 0.1 percent of the income distribution. These estimates suggest that after taking the deterrence effect into account, each dollar spent on audits of filers in the top 10 percent of the income distribution yields more than $12 in revenue in taxes owed that might otherwise go unpaid.
Research by former U.S. Treasury Department officials Natasha Sarin and Mark Mazur examines the sources of the tax gap and argues that approximately $2 trillion in taxes owed by the top 1 percent of the income distribution will go unpaid over the next decade due to tax evasion based on current IRS estimates.
Addressing corporate tax avoidance
Using funds provided by the Inflation Reduction Act, the IRS has stepped up efforts to ensure that large corporations pay the taxes that they owe by expanding targeted audit programs, with a particular focus on complex cross-border issues and ensuring that U.S. subsidiaries of foreign multinationals pay taxes on profits earned in the United States. The revenues at stake in these efforts are substantial. In one recent effort, the IRS prevailed in U.S. Tax Court in Bats Global Markets Holdings Inc. and Subsidiaries v. Commissioner of Internal Revenue, a case involving abuse of a repealed corporate tax break that upheld the denial of a $1.8 billion deduction. In another high-profile instance, the agency notified Microsoft that the company owed an additional $28.9 billion for the period 2004 to 2013 related to disputes over how the company allocated profits among countries. While Microsoft has appealed the IRS’ action, additional resources will enable the IRS to pursue large corporations that have skirted the tax laws to avoid paying the full amount that they owe. In December 2023, a Swiss bank agreed to pay the U.S. Treasury $122.9 million for its role in helping U.S. taxpayers avoid taxes through the use of undeclared bank accounts.
Rebalancing tax enforcement
The IRS’ ability to address sophisticated tax avoidance by the wealthy and large corporations was severely eroded by past budget cuts. The audit rate for corporations with $20 billion or more in assets dropped from 86.7 percent in 2010 to 57.2 percent in 2018, the last year for which the full statute of limitations had run prior to the publication of the most recent data. The trend in declining audits continued through 2020 with a similar drop in the rate for the highest-income households. This drop largely reflected the agency’s loss of highly skilled staff capable of managing difficult examinations.
Using artificial intelligence and data science techniques, the IRS has stepped up audits of the 76 largest partnerships including hedge funds, law firms, and large real estate investment partnerships. These powerful tools allow the IRS to find issues associated with the highest risk of noncompliance and to deploy audit resources effectively.
Conclusion
Congress should reject proposals backed by Republicans in the House to rescind more of the funds provided by the Inflation Reduction Act as well as efforts to further reduce baseline spending for the IRS through the appropriations process. Lawmakers should instead continue efforts to modernize the agency that improve customer service and ensure that the wealthy and large corporations pay what they owe. Initial efforts are already bearing fruit, but stable, long-term support from Congress is necessary to rebuild the agency and avert a spending cliff when funds from the Inflation Reduction Act are exhausted.
This article was published by the Center for American Progress.
No comments:
Post a Comment