On Aug. 16, President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The IRA is the culmination of Democrats’ efforts to address climate change, prescription drug prices, and the economy. Tax provisions in the law focus on providing increased clean energy incentives and several revenue raisers, including a new 15% minimum tax on large corporations (estimated at $222 billion), a new 1% excise tax on stock buybacks by publicly held corporations (estimated at $73.6 billion), a two-year extension of the deduction of excess business losses for noncorporate taxpayers (estimated at $52.7 billion), and an $80 billion increase in IRS funding (estimated at $124 billion).
IRS funding part of Inflation Reduction Act of 2022
Sign up to receive the latest tax insights as well as tax regulatory and administrative updates.
Increased IRS funding
A major component of the IRA is a significant investment in the IRS. Of the $80 billion allocated to increased IRS funding, approximately $46 billion is targeted at enforcement. The remaining amount goes toward upgrading the IRS’ antiquated technology, which would further enhance its enforcement abilities and increase its customer service performance, a longtime and frequent target of taxpayers and the IRS’ critics.
Despite these goals, the IRS faces significant obstacles in implementing its new funding. Upgrading its enforcement capability and customer service operations will require manpower. The IRS will face significant challenges in onboarding thousands, perhaps even tens of thousands, of new employees, a task that will be magnified in the highly competitive job market the IRS will find itself in. Even after adding personnel, it will take the IRS significant time to train and integrate its new army of inexperienced revenue agents and other personnel. Inevitably, a major portion of training these new hires will involve on-the-job training while examining a variety of taxpayers who have complex tax positions.
Further complicating its effort is the concern among opponents of the IRA that increased IRS resources will be targeted at low-income, middle-income, and small-business taxpayers. These concerns contributed to Treasury Secretary Janice Yellen issuing a directive to IRS Commissioner Charles Rettig to confirm the U.S. Department of the Treasury’s commitment that new IRS enforcement resources resulting from this legislation will focus on “high-end noncompliance” and not be used to increase the likelihood of audit for small businesses or households earning less than $400,000. Yellen has given Rettig six months to present her with a plan to use the funds.
Large and midsize business taxpayers and high-income individuals can expect the following in their interactions with the IRS:
- Increased IRS examination activity. While the IRS might not be able to dramatically increase its enforcement capabilities overnight, $80 billion in new funding will place additional pressure and expectations on it to sharpen its focus on large and midsize businesses and on high-income taxpayers.
- Inexperienced IRS revenue agents and related challenges. Taxpayers might encounter IRS representatives who lack IRS institutional knowledge, familiarity with IRS audit procedures, and technical tax expertise, all of which could lead to more frustrating and longer audits and fewer agreed upon cases at the examination level. As a result, more cases than necessary could go to the Independent Office of Appeals and the courts, which would further increase the time and cost of resolution.
- A continuation of IRS customer service-related problems and the pandemic-related backlog. Despite its new funding, it will take time for the IRS to hire and train the thousands of new personnel needed to address and improve the IRS’ customer service problems. Additionally, the IRS already has millions of unprocessed returns in its system that, despite its assertions to the contrary, still might take months or longer to process and will contribute to continuing challenges for taxpayers.
Looking ahead
Going forward, taxpayers should proactively prepare to be confronted by this new, ever-changing IRS landscape. Taxpayers should consider taking the following steps to improve their interactions with IRS agents:
- Increase vigilance in maintaining accurate and detailed tax-related records with the prospect of a future examination in mind. The odds of future audits are likely to increase. Maintaining thorough records, while always a good practice, will be even more crucial in an environment of heightened IRS scrutiny, particularly if dealing with inexperienced examiners.
- Engage qualified tax advisers to help resolve IRS tax controversies. More than ever, taxpayers will be faced with inexperienced IRS auditors and personnel and will need experienced advisers to navigate evolving IRS procedures to help promote fair and accurate tax treatment.
The Senate-passed Inflation Reduction Act contains changes to the initially proposed bill and moves to the House, which is likely to act quickly.
The Senate’s newly passed Inflation Reduction Act includes a new corporate minimum tax, carried interests, and clean energy incentives.
The Senate-passed Inflation Reduction Act contains changes to the initially proposed bill and moves to the House, which is likely to act quickly.
The Senate’s newly passed Inflation Reduction Act includes a new corporate minimum tax, carried interests, and clean energy incentives.
Our experienced tax professionals can help you tackle your most pressing tax challenges. Contact the Crowe tax team today.
