The Inflation Reduction Act of 2022 – new multi-billion-dollar energy, healthcare, and tax legislation – provides $80 billion to the IRS and has some people worrying about new IRS agents and audits.
President Biden recently signed the Inflation Reduction Act, a sweeping energy, tax, and healthcare law that is partly designed to reduce the deficit. The legislation includes $80 billion in increased IRS funding over ten years.
The idea is that the funds could help improve tax compliance, which in turn, could bring in an estimated $203 billion in increased revenue. It’s too early to know what the impacts will be.
But you may have heard some lawmakers say that because of the new law, an “army” of 87,000 new IRS agents will be coming to audit ordinary taxpayers.
As is often the case involving matters of tax policy, the reality is somewhere in the middle. That’s why it’s important to know a few things about the Inflation Reduction Act and IRS enforcement, including how the IRS funding increase and more IRS hiring might impact you.
IRS Enforcement in the Inflation Reduction Act
Of the $80 billion for the IRS in the Inflation Reduction Act, $45.6 billion is designated for enforcement. And since the new law calls for more IRS hiring, there will be more new IRS agents in the coming years. Those new agents will have to be trained to conduct compliance audits (which takes time), but ultimately, there will likely be an increase in audit activity as well.
Why do people mention 87,000 agents? The 87,000 number appears to come from a 2021 Treasury Department estimate of the level of hiring needed to maintain IRS efficiency and keep up with retirements and other staff declines.
However, the actual number of new IRS agents that will be hired because of the Inflation Reduction Act remains to be seen.
It should also be noted that enforcement doesn’t only mean more IRS agents. The Congressional Research Service points out that more enforcement could include legal support (e.g., the Tax Court gets about $150 million under the new law), and investments in technologies that aid IRS investigations.
Increased staffing would also likely include a variety of positions and roles that need to be filled at the IRS – not just enforcement agents.
Who Gets Audited by the IRS?
Since increased IRS enforcement will eventually lead to more audits, a common question is whether those audits will focus on low and middle-income earners.
A Government Accountability Office report found that in the past, lower-income taxpayers have seen higher-than-average IRS audit rates. Other FY 2021 data show that IRS audit rates for people with less than $25,000 a year in income were five times higher than audit rates for high-income taxpayers.
But so far, the Treasury Department has indicated that low or middle-income earners, and small businesses, won't be the focus of increased IRS enforcement activity under the Inflation Reduction Act.
Ultimately though, the IRS wants to close an estimated $600 billion “tax gap.” (The tax gap is the difference between what people owe in taxes and what they actually pay.)
To do that, the agency plans to focus on high-earners, large corporations, and complex partnerships. That’s potentially good news if you’re a household making less than $400,000 a year or a small business.
But, if you are wealthy, you could see some increased audit activity in the coming years. Although, it’s hard to know what higher audit rates will look like, partly because IRS audit rates have historically been low.
Tax Refund Status
The Inflation Reduction Act also provides $4.8 billion to modernize business systems. So, the IRS could improve outdated phone systems and technology that currently get in the way of serving customers like you.
Did you know that the IRS still uses computers that rely on COBOL – a more-than 50-year-old computer programming language?
Additionally, you may remember that during the COVID-19 pandemic, millions of tax returns and refunds were caught in a massive IRS backlog.
The $3.2 billion for taxpayer services in the Inflation Reduction Act could be used to improve customer service. That includes having more people to answer the more than two million phone calls that the IRS reportedly receives each day during tax season.
The money could also help the IRS avoid ending the tax season with millions of unprocessed returns, as they did in 2022.
IRS Criminal Investigation
So, it’s true that the IRS is supposed to get $80 billion in additional funding over the next ten years and will use some of those funds to hire new IRS agents and other staff.
And yes, the Inflation Reduction Act is designed to increase tax compliance, which is expected to focus on wealthy people and large corporations.
So, what’s all the talk about armed IRS agents?
Talk of the IRS hiring armed agents could be referring to the IRS CI, a division that focuses on the enforcement of criminal tax cases.
IRS criminal investigation special agents are authorized to carry firearms in certain circumstances. That’s because those approximately 2,100 agents work on cases where arrests are sometimes warranted.
However, the IRS does not arm its typical enforcement agents, despite what you may have heard recently.
In an attempt to dispel viral information about IRS agents, an op-ed by IRS Commissioner Charles Rettig was published on Yahoo Finance on August 26. In that piece, Commissioner Rettig addressed the ongoing debate, and concerns over the Inflation Reduction Act funding for IRS enforcement.
Commissioner Rettig also reportedly sent a letter to IRS staff in late August, saying that the agency will conduct a comprehensive review of its safety and security measures.
That review comes as the IRS is experiencing increased threats that it attributes to online misinformation about IRS enforcement under the Inflation Reduction Act.
So, while enforcement activity, taxpayer services, and operations at the IRS could get a boost in the coming years because of the Inflation Reduction Act, you shouldn’t have to worry about a literal army of new IRS agents coming for your tax dollars. Instead, stay informed, and tune in to any announcements or audit requests from the IRS.
As the IRS grows its ranks, regardless of what jobs the new people do, you can be sure that the number of overall audits will increase. In fact, it was stated that money gained from additional audits is intended to pay for some of the Inflation Reduction Act.
Given that, if you get a notice of audit from the IRS – or find yourself on their radar in any way – don't ignore it! Contact me or any member of my Tax Problem Solver team for help, and we'll start the ball rolling.
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