Inflation Reduction Act Gives the IRS a Significant Boost. What Does It Mean?

“The Inflation Reduction Act (IRA) will provide approximately $80 billion over 10 years to fund the IRS and improve tax enforcement activities and technology.” Audible gasps can be heard from business owners and individuals alike as they imagine the process of being audited and hit with fines and penalties.

It’s no secret that in the past five years, the IRS has had a tough time, operating on a budget that was slashed by 20% since 2010 (as of 2020). The Service has been fighting an uphill battle that was compounded by a global pandemic that has made a lasting impact.

Delayed filings, COVID relief programs, mail backlogs and technology issues have plagued the IRS for the better part of the last decade, so it’s about time they receive some reinforcements. The prospect of more employees dedicated to looking into your business’s accounting practices and finances is quite daunting, but will there really be such a dramatic increase?

IRS by the numbers

Currently, the IRS employs nearly 95,000 workers; of those 95,000 just over 21,000 fall within the enforcement category (revenue agents, tax examiners, revenue officers and special agents) tasked with conducting audits and investigations. That leaves more than 70,000 workers to other more “administrative” roles outside of enforcement.

It’s estimated that of the approximately 95,000+ IRS employees, about 65% of them plan to retire within the next five years, that’s over 50,000 employees for those keeping score. We believe that the first priority with the Inflation Reduction Act funds will be the replacement and adequate training of the employees selected to fill those retirement-driven vacancies.

Allocation of Inflation Reduction Act funds

While this was not mandated in the legislation, and the IRS will have final discretion to allocate these funds, we are estimating that $45 billion will be dedicated to “increased enforcement” and the remaining $35 billion towards taxpayer services, computer systems, and technology upgrades. The latter should be music to the ears of everyone who endured exorbitantly long wait times when calling in and those that waited extended periods to receive refunds.

Increased enforcement

When all is said and done, the IRS plans to add about 22,000 new employees, with 9,000 falling within the enforcement category. Going forward, instead of 21,000 employees dedicated to monitoring financial activities, there will be roughly 30,000 as we anticipate that some of those employees will be responsible for the collection of penalties and unpaid taxes.

It won’t happen overnight, the additional 9,000 employees will be added over the course of the next 5-6 years and will need to be properly trained.  We do not anticipate a sudden increase in audits, but rather a gradual increase over the next decade or so.

With additional resources dedicated to enforcement, an increase in audits is almost inevitable, but there is still time for some financial housekeeping to be prepared in the event of an audit, and time to work with our tax professionals to ensure compliance for both your business and personal financial matters.

Maybe increased enforcement resources will actually improve the audit process...