What $80 Billion More for the IRS Means for Your Taxes

The last Tax Report came out just as Congress took up the Inflation Reduction Act, and it discussed the bill’s $80 billion in proposed new Internal Revenue Service funding. Over half the new dollars were earmarked for new tax enforcement, especially audits of high-earning taxpayers, while the rest was to improve operations, technology and taxpayer service.

Now the bill is law, signed by President Biden on Aug. 16. Although details changed, the IRS’s $80 billion in new funding survived and is in place to be spent over a decade. Supporters of the law, who have long complained that IRS appropriations have been too erratic to fix fundamental problems like 1960s-era technology, are pleased with the stable funding.

The bill’s passage means there’s more for taxpayers to know, both to counteract recent wild claims and to prepare for what’s ahead. Here are highlights.

There won’t be 87,000 new IRS agents with guns

According to the Treasury Department’s plan, part of the new funding will go to hire 87,000 workers over 10 years. This figure includes all hires, such as customer service reps and tech workers as well as agents. It doesn’t take into account that due to the IRS’s aging workforce, more than 50,000 retirements and other departures are expected in the coming years.

Some of the funding’s opponents have said the 87,000 hires will be armed. According to an IRS spokesman, the only agency staff allowed to carry guns are 2,100 special agents in the criminal investigation division, and they make up less than 3% of the total current IRS workforce of about 80,000.

According to Natasha Sarin, a Treasury official overseeing the IRS, about 1,000 of the hires will be special agents, with many replacing departing agents. In the late 1990s, the agency had 3,500 special agents.

Funding could shift

The new $80 billion for the IRS over ten years is on top of the agency’s annual funding, which for fiscal 2022 is about $13 billion. Congress will continue to make annual appropriations for the IRS, and the party in charge could alter them.

For example, lawmakers could shift annual allocations so that less goes to enforcement and more to customer service. They could also cut or raise this funding.

The Inflation Reduction Act doesn’t directly address the crushing IRS backlog—but Congress is on it

The $80 billion seeks to rebuild the IRS after years of lower funding. Meanwhile the agency has a backlog of about 17 million unprocessed paper tax returns for individuals and businesses plus correspondence it’s behind on, in part due to the pandemic.

Earlier this year IRS Commissioner Chuck Rettig said he expected this situation to be “healthy” by year-end. But with the IRS processing about 500,000 returns per week at best and more coming by Oct. 17, the math isn’t favorable. However, on Aug. 17 National Taxpayer Advocate Erin Collins said the weekly number of processed returns is rising.

This past week, a bipartisan group of Congress members sent a stern letter to Mr. Right asking for more backlog details. The letter also urged the IRS to extend the suspension of automated collections and notices, which were paused earlier because the agency could not process mail from taxpayers. Stay tuned.

More audits are coming, but not soon

It will take time for the IRS to staff up, especially in a tight labor market. By one estimate, new agents aren’t fully productive for three to five years.

The Treasury Department has pledged to use the new funding to focus on tax underpayments by higher-income people. Their returns are often more complex than lower earners’ returns, and the IRS needs to devise new audit methods.

About the audit threshold of $400,000 of income

Treasury and IRS officials have said the new funds for tax enforcement won’t increase audits on filers making less than $400,000, which some have called into question.

Wed Aug. 10, Treasury Secretary Janet Yellen sent a letter to the IRS with more specifics. It says the new funding “shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.” The Treasury directive leaves room for audits of taxpayers claiming, say, $300,000 of income that have another $200,000 of unreported income.

The bottom line, says Ms. Sarin: “For honest taxpayers earning less than $400,000, the chances of being audited are going down.”

Mrs. Yellen’s directive isn’t binding on future administrations.

An ‘audit’ isn’t always an audit

Many filers think any contact with the IRS is an audit, but it is not. In a true audit, the agency examines a taxpayer’s records and requires proof of income, deductions or credits on the return.

What isn’t an audit? Among other things, a letter saying a filer omitted income paid by a bank or employer, or a “math-error notice” that assesses tax for a mistake detected by an IRS computer. Still, these issues can be scary and require a taxpayer response.

With better IRS systems and the end of the backlog, it should be easier to resolve these issues, but taxpayers who encounter them shouldn’t think they’re evidence of rising audit rates.

If you’re thinking of putting your tax house in order…

Some pertinent information: The statute of limitations is three years for routine issues and six years for many major ones, but the clock doesn’t start to run until a return is filed. As of Oct. 1, the interest rate on most tax underpayments rises to an annual equivalent of 6%. This rate resets quarterly, so people with overdue tax payments can still benefit from lower rates for previous quarters.

Write to Laura Saunders at laura.saunders@wsj.com

President Biden on Tuesday signed into law sweeping legislation aimed at lowering prescription drug prices and boosting the renewable-energy sector. The bill also imposes new taxes on large corporations to reduce the federal deficit. Photo: Mandel Ngan/AFP/Getty Images

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