Don't Mess With Taxes

Photo by David Boeke via Flickr

Democratic leaders in the Senate are still aiming to vote next week on the Build Back Better bill rewrite by Senate Majority Leader Charles Schumer of New York and his intraparty frenemy Sen. Joe Manchin of West Virginia.

UPDATE, Sunday, Aug. 7, 2022: The Senate approved the Inflation Reduction Act of 2022 today along a 50-51 party-line vote, with Vice President Kamala Harris casting the deciding vote. The House is expected to consider the measure on Friday, Aug. 12.

The 725 revised pages of H.R. 5376, now dubbed the Inflation Reduction Act of 2022, obviously contain a whole lot of law changes. But they are divided into three key categories: dealing with prescription drug prices, moves to cope with climate change, and, of course, taxes.

The bill's two main tax components would, per the summary from Schumer's office, impose a 15 percent corporate minimum tax on corporations with profits in excess of $1 billion, and re-build the Internal Revenue Service.

Since neither I nor most (any?) of my readers are running billion-dollar corporations, I'm focusing today on the IRS provisions.

Most of us regular Jim and Jane Taxpayers, and our tax professionals, have endured years of problems with the IRS as it faced budget cuts and staff attrition. Things got worse during the last three filing seasons that were affected by the COVID-19 pandemic. So we'll take any attention ($$$) given the tax agency so it can make changes that might help us.

Here's how the authors of the Inflation Reduction Act say it will help.

First, the dollars: The Internal Revenue Service will get more money — lots more — to bulk up its taxpayer compliance efforts.

The nearly $79 billion appropriated for the agency's use over the next nine fiscal years is to be distributed as follows:

• $4,750,700,000 for business systems modernization
• $3,181,500,000 for taxpayer services,
• $25,326,400,000 for operations support, and
• $45,637,400,000 for enforcement.

I know. The smallest allocation is for taxpayer services. But, hey, any amount has got to help.

Taxpayer services that should benefit from the funds include pre-filing assistance and education, filing and account services. Taxpayer advocacy services also will get some of the money.

Bringing the IRS' antiquated systems into the 21st century will include things like development of callback technology, along with other technology that can provide "a more personalized customer service." Even more advanced tax bots, anyone?

And dollars for modernizing systems also have to help taxpayers, too, right. Right? 🤞

Tax evasion targeted: Everyone's getting tired of hearing about the Tax Gap. That's the estimated $441 billion that the IRS says it is owed but hasn't been able to collect.

But the writers of the Inflation Reduction Act say they can help close it. The bill provides Uncle Sam's tax collectors with almost $46 billion to get that job, or at least part of it, done. The money will go toward IRS efforts to:

• Determine and collect taxes;
• Provide legal and litigation support;
• Conduct criminal investigations;
• Provide digital asset monitoring and compliance activities; and
• Enforce criminal statutes related to violations of the Internal Revenue Code and other financial crimes.

These new and enhanced enforcement efforts mean the IRS will be spending some of the money on hiring and training of new auditors.

IRS funds to explore in-house e-file option: The IRS is a big advocate of electronic filing. When taxpayers submit computer generated tax returns, the information goes directly into the agency's system, instead of having to input by hand from paper forms.

Sidestepping additional human involvement with a return means fewer errors in the entry of the 1040 data. E-filing also obviously speeds up the processing system.

Currently, the IRS depends primarily on the use of private tax preparation software by individual taxpayers and the tax preparers they hire. The agency partners with some of these software companies to offer their products to taxpayers via IRS Free File.

But the clamor from members of Congress and even a government watchdog for a direct, IRS-administered online tax preparation and e-filing option is getting louder. And the Inflation Reduction Act is providing funds for the agency to look into what it would take to accomplish its own e-filing program.

The bill allocates $15 million to the IRS so it can prepare and deliver a report to Congress on the cost of developing and running a free direct e-file tax return system.

Capitol Hill wants to know three things —

1. the cost of developing and operating a program, including options for differential coverage, based on taxpayer adjusted gross income and return complexity, as well dealing with multi-lingual taxpayers, and including mobile-friendly features and safeguards for taxpayer data;
2. taxpayer opinions, expectations, and level of trust for a free, direct e-file system; and
3. the opinions of an independent third-party on the overall feasibility and capacity of the IRS to implement an e-file system.

The funds are available to conduct the report during the upcoming fiscal year, which ends on Sept. 30, 2023.

Other tax-related funds: In addition, the bill allocates additional funds over the next nine years to several other tax-related federal offices.

The U.S. Tax Court gets $153 million. The Treasury Inspector General for Tax Administration (TIGTA) gets $403 million. Treasury Department's Office of Tax Policy gets $104.5 million to carry out its functions related to promulgating Internal Revenue Code regulations.

Again, all these amounts are through the fiscal year ending Sept. 30, 2031, and, per the bill, "in addition to amounts otherwise available for such purposes."

Many dollars, many years: The multi-year nature of the funding, especially for the IRS, no doubt is welcomed by IRS Commissioner Chuck Rettig and his staff. The agency is used to fighting for any increase in its annual fiscal allocation provided by Congress.

Those budget battles will continue, but the average per-year hike of $5 billion in the bill for enforcement doubles the agency's recent years' budgets for collecting taxes and nailing those who refuse to do so.

And while estimating the return of federal dollars is an imprecise science, the Inflation Reduction Act of 2022 authors are giving it a go as far as IRS services. Based on prior Congressional Budget Office analysis (the latest of which showed an unexplained increase in 2020-21 tax collections), the Senate estimates that improved tax enforcement will generate $124 billion for the U.S. Treasury.

If that projection holds, that's a pretty good return on the $45.6 billion allocated for tracking down missing tax dollars, so the $124 billion savings for Uncle Sam is this weekend's By the Numbers figure.

You also might find these items of interest:

• Tax Gap likely $1 trillion, thanks largely to cryptocurrency
• IRS approves some fake charities. What's a donor to do now?
• Schumer-Manchin bill renews EV tax credit, even for autos previously phased-out autos

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