News that the Internal Revenue Service (IRS) plans to hire some 87,000 new employees over the next decade has some taxpayers guessing if that will mean an army of new agents conducting audits or simply that someone will finally pick up the phone when you call your local IRS office. The answer is likely a bit of both, with a whole lot of "we do not know yet!" thrown in.
This issue first took center stage back in August when many were on vacation or getting ready to send the kids back to school with President Joe Biden signing the Inflation Reduction Act into law on August 16, 2022.
CNBC reported that the “sweeping $739 billion spending package – a reduced version of the administration’s Build Back Better plan – aims to reduce healthcare costs, shrink the deficit, and combat climate change.”
One of its provisions authorized $80 billion in funding for the Internal Revenue Service (IRS) over the next 10 years.
CNBC says that “more than $45 billion is earmarked for enforcement – part of an effort to close the estimated $600 billion “tax gap”, the difference between what Americans owe and what they actually pay.”
It didn’t take long for memes to spread highlighting that legislation would result in 87,000 new IRS agents.
Will there be an “Army of Auditors” Hired?
CNBC said that “the image you’ve likely seen bouncing around social media: an “army” of 87,000 new IRS agents beating down your doors to conduct audits.”
While there is not a specific 87,000 new hire number in the legislation signed, the number came about in research leading up to the bill passing.
A May 2021 report from the Treasury Department assessing how the IRS could use an $80 billion appropriation said that the IRS “could add nearly 87,000 new staff – not all of them enforcement agents – in order to “rebuild” and “revitalize” the agency.”
To be specific, Reuters reported that the report “estimated the money could fund 86,852 full-time hires through 2031.”
The IRS says that some of these new hires would replace existing staff that will leave in the next five years, including retirements, with IRS Commissioner Charles Rettig saying the agency will “lose around 50,000 of its 80,000 workers over the next five years” in 2021 congressional testimony.
It should be noted that Reuters reported that Representative Kevin Brady, the top Republican on the tax-writing House Ways and Means Committee, disputed the Treasury’s assertion that many of the new hires would replace retirees, saying that “the existing budget can replace them. These are all new.”
New hires, however, do not necessarily mean new auditors or enforcement agents with the IRS also planning to add “tens of thousands of new customer service personnel and information technology specialists”, according to Reuters.
Robert Cordasco, a CPA and founder of Cordasco & Co in Savannah, Georgia told CNBC: “When we hear 87,000 agents, it sounds like a horrifying army of people. But it’s what they need to maintain because people are exiting in volumes. I don’t know how much it adds as much as it gets us to the status quo.”
IRS Budget Woes Date Back at Least a Decade
Bloomberg Tax reported in March 2022 that the IRS has been facing budget woes for at least a decade.
“For the fiscal year 2020, the IRS budget came in at nearly $2 billion less than it was ten years ago,” said Bloomberg Tax. “These reductions have clearly affected staffing. While the IRS had nearly 95,000 full-time equivalent positions in the fiscal year 2011, that number had dropped to 75,733 for the last fiscal year.”
During that same time frame, the number of individual taxpayers filing with the IRS has increased by 19 percent, according to the National Taxpayer Advocate Erin Collin’s report to Congress.
That report highlighted that the IRS was not “doing more with less” but having a multitude of problems.
“The year 2021 provided no shortage of taxpayer problems,” said Collins in the report. “Calendar year 2021 was surely the most challenging year taxpayers and tax professionals have ever experienced”
2021 tax year problems included:
- Long processing and refund delays
- Difficulty reaching the IRS by phone
- Correspondence that went unprocessed for many months
- Collection notices were issued while taxpayers' correspondence was awaiting processing
- Limited or no information on the "Where’s My Refund?" Tool for delayed returns
- Difficulty obtaining timely assistance from the Taxpayer Advocate Service
The 87,000 new hires hope to shore up a decades-long trend during which Collins says that “examination coverage has decreased, enforcement efforts have been negatively impacted, and the level of service has continued to drop as the IRS’s workforce and budget have declined.”
Bottom Line: There Will be More IRS Audits
Under the new law, however, we can expect the IRS, with more funds and new employees, to conduct more tax audits.
“But it’s important to remember that audits are rare and have only grown rarer in recent years as the IRS has bled staff and resources,” says CNBC.
A Government Accountability Office (GAO) report found that between 2010 and 2019 the IRS audit rate for individuals dropped from 0.9 percent to0 0.25 percent.
“Those rates vary by income level, with those making less than $25,000 and those with incomes above $200,000 receiving higher-than-average scrutiny in recent years,” says CNBC.
So, who can expect to get an audit moving forward with more agents onboard and more audits planned?
“The absolute number of audits will go up, but the share of people audited will likely be the same for households earning less than $400,000 per year,” Glenn Borst, senior legal analyst at Wolters Kluwer Legal and Regulatory U.S., told CNBC.
Cordasco added, according to CNBC, that the budget numbers are spread over a decade so do not expect changes overnight but also cautioned: “You still always need to be cognizant of coloring within the lines.”
CBO Analysis: Middle Class Could See More Audits
The Wall Street Journal pointed out in an Aug. 14, 2022, editorial that the “share” of middle-class taxpayers being audited remaining the same, could mean more audits overall for those making under $400,000 as total audits rise.
The Wall Street Journal said that a Congressional Budget Office examination found that IRS “scrutiny on filers earning less than $400,000 would account for $20 billion over 10 years, out of a total of about $204 billion” that is hoped to be collected by enhanced enforcement.
“In other words, the IRS expansion as it’s currently designed could collect billions in revenue from new middle-class audits,” said the Wall Street Journal. “The problem is that for every tax cheat the IRS identifies, several more compliant tax filers will be subjected to needless scrutiny. Many of the hundreds of thousands of people audited each year are chosen at random, and most taxpayers can’t afford a lawyer to go to Tax Court to contest IRS claims of tax liability. They write the check to end the relentless IRS pursuit, whether or not they think it’s fair.”
More will become clear, according to Politico, when the Treasury Department presents a detailed spending plan for the money in February 2023.
Politico noted there is some legislation being pitched that aims to pin down the details of the new IRS funds including:
- Withholding IRS enforcement money until it meets benchmarks for improved customer service
- Requiring that the plans for the new IRS funds be subject to a vote in Congress
- A law that would prevent audit rates from increasing on those making under $400,000
How Best to Avoid an IRS Audit
The key to avoiding an IRS audit is to steer clear of common tax return mistakes.
Borst told CNBC some of the most common mistakes he sees include:
- Claiming losses from a business activity the IRS views as a hobby
- Forgetting to sign your tax return
- Income not matching what is reported to the IRS
- Mathematical errors
- Mismatched tax ID numbers
- Mis-entering dependents’ social security numbers
- Numbers in your return not matching documents submitted by other payers
- Overestimating the value of property donated to charity
- Reporting unusually large deductions compared to previous years
In the event of an IRS audit, the taxpayer’s best strategy is to get the advice of a professional tax attorney.
“An experienced tax attorney can quickly explain to you what type of audit you are facing and recommend a proven course of action that will get you through what is, unfortunately, a stressful and intimidating time for most taxpayers,” said Steve Powell of Powell Tax Law.
Contact Powell Tax Law’s Houston or San Antonio area location’s today for advice on how to handle an IRS audit or any other important tax-related issues you may face.
