US increases IRS spending to enhance IT and enforcement

The Internal Revenue Service will soon receive $80 billion from the Biden administration to improve its IT systems and enforcement procedures.

According to sources, the Internal Revenue Service will likely conduct more audits of large taxpayers with the $80 billion in funding it will receive from the Inflation Reduction Act for tax enforcement.

To complete the audit work, the IRS will need to hire and train thousands more revenue agents and support personnel. The investment is expected to increase tax revenue by $203.7 billion.

The tax administration in Washington, DC, according to one IRS division chief counsel, "Enforcement resources will focus on high-end noncompliance."

The counsel continues, "These resources will support both an investment in taxpayer service so that the IRS is finally able to communicate with taxpayers in an effective, timely manner, and a much-needed upgrade of technology that is decades out-of-date.

The IRS will receive $45 billion over ten years for tax enforcement, $25 billion for operations, and $5 billion for technology modernization.

Approximately 87,000 workers in a variety of positions, including auditors, customer service representatives, and IT staff, are expected to have their costs covered by the funding. As its incoming financing is disbursed in installments over the coming months, the IRS will provide precise numbers.

The central management system needs significant changes, according to IRS staff. In an increasingly digital global tax environment that necessitates intensive data processing, the service has an excess of documents.

"The cafeteria in the IRS's Austin office is stacked wall to wall with paper returns awaiting processing," observes Ana Sanchez-Navarro, a tax examiner in Austin.

She says, "I had heard stories about the antiquated IT, but I could not believe it until I saw it."

The IRS has a backlog of 10.2 million returns that are awaiting processing, she continues, so "almost every inch of shelving and hallway in this building is stacked with paper."

However, according to sources, Congress has consistently underfunded the organization, even cutting funding for the majority of the last ten years. Without reliable long-term funding guarantees, the IRS has had trouble making system-wide automation and upgrade investments.

Even the US Treasury stated in a letter to Congress dated August 10 that funding was necessary to enhance taxpayer services. The IRS needs to update its outdated technological infrastructure if the Treasury is to increase equity in the tax system and modernize its enforcement of large corporations that fail to pay their debts.

Since these procedures are largely manual and closely guarded, the IRS system upgrades will probably concentrate on changes that can enhance communication channels and speed up inquiries from large taxpayers.

One version of a tax form can be kept in the IRS system at a time because tax forms change from year to year. The majority of taxpayers submit their returns electronically, but even those who do so risk being stuck with a physical paper trail if there are any problems with the return.

The taxpayer then receives a paper letter from the IRS, and any reply must be sent via mail as well. The outdated systems, however, are unable to handle all the taxpayer data at once. A single annual return that contains information in more than a predetermined number of fields, for instance, cannot be stored on the system.

iAccording to Sanchez-Navarro, "in some ways, the system seems to be held together with duct tape and string."

The money could aid the IRS in weaning itself off reliance on third parties to handle data processing. Data protection has been one of the agency's biggest problems in recent years. More data should be processed and sorted internally as a result of the technological advancements.

The IRS has been able to reduce costs, reduce tax fraud, and empower employees in the short term to meet taxpayer expectations thanks to system providers that work with the tax authority.

The IRS and businesses, according to the head of global tax and trade at a multinational technology company in Seattle, will benefit from improved infrastructure.

According to the head of tax, "a sustainable tax technology infrastructure benefits tax administrations and taxpayers by increasing taxpayer services and voluntary compliance."

The IRS has not kept up with providing tax credits and other services, despite improvements brought about by outsourcing data structuring to service providers. Due to slow service, businesses have been forced to postpone important decisions.

As more tax credits are coming in and more advanced pricing agreement (APA) applications are coming in, there has been an increase in the number of services requested by corporate taxpayers from the IRS.

Nearly half of the agency's 79,000 full-time employees are already devoted to enforcement work in those fields, which includes figuring out taxes due, offering legal assistance, carrying out desk-based audits, and upholding criminal laws for violations of Internal Revenue laws and other financial crimes.

In a letter to Congress, US Treasury Secretary Janet Yellen addressed the funding issue. fIn the letter, Yellen stated that "for too long, the agency has not had the resources that it needs to ensure the tax laws are enforced."

The IRS also takes a long time to complete a number of corporate tax treatments, such as refunds on R&D tax credits for direct-pay taxpayers. The policy is intended for taxpayers who rely on returning tax credits for additional funding to complete projects but do not have enough tax liabilities to use them.

As a result, Crystal Chen, director of international tax at San Jose-based computer chip manufacturer AMD, highlights a lack of certainty.

Because there are still unanswered questions about how the IRS will handle new credits in the long run, Chen says it is unclear how effective refunding any new credits will be.

More resources, however, might alter this perception. The IRS would probably need to issue more guidance in order to implement the direct pay rules for incoming tax credits.

Internal tax experts are already examining the current guidelines and implementation procedure to determine whether holding onto more refundable credits is worthwhile.

According to one R&D tax credit expert at the tax advisory firm Crowe, the IRS follows rules that could make it difficult for the new R&D credit to be effective in offsetting research costs.

The IRS stated in a memo in September 2021 that it is looking for more thorough reports about R&D tax credits from large taxpayers. This pays for all of the costs that their future R&D credits will increase.

The taxpayer is required to list every research activity that was carried out, who carried it out, and why for each business investment project. The US Treasury's 2021 statistics also indicated a rise in APA demand.

After two years of steady application volume, there were nearly twice as many new APA requests in 2021, totaling 145. There were only 29 multilateral APA requests in the previous 20 years, so eight of these were multilateral APAs. This is by no means a significant number.

The IRS and Senate Finance Committee are currently looking into the tax procedures at large companies, which coincides with this change in tax controversy planning. The pharmaceutical sector is home to many of the companies in question.

The COVID-19 pandemic caused many experienced auditors to leave, so the IRS is also preparing to start hiring more of them. The IRS should be able to concentrate on more challenging audit work as a result of additional hires.

To phase in the funding, hire, and train more staff, though, will take time. Auditors are likely to have a training program and deal with cases worth $100,000 instead of $10,000,000.

According to the IRS Chief Counsel, "we are not going to give a new trainee General Motors, for example, it is just not going to happen."

With more than 4 million returns to audit, the IRS can only begin 7,500 audits each year. Additionally, the agency lacks the resources to pursue a number of its pending cases that have transitioned from audits to court cases.

Each corporate tax return is given a score by the IRS using software, and tax returns with higher scores are more likely to be audited. Refundable tax credits and unreported income are frequently warning signs for IRS audits.

Refunded credits are more likely to cause the system to flag a return than income that is outside of the acceptable ranges.

The lawyer explains, "This way just makes it easier to sort through."

The alternative, she continues, "is challenging work as it requires a team of sophisticated revenue agents to spend thousands of hours looking over complicated returns, but that has huge revenue potential."

The TP examination procedure was made public in 2018 by the IRS's treaty and transfer pricing (TP) operations of the large business division. This is a guide to auditing TP policies for IRS agents that includes useful resources and best practices.

The counsel and some other sources have identified the audit guide as another area that needs to be replaced with more resources.

The chief counsel notes that the transfer pricing examination program (TPEP) "acknowledges that transfer pricing examinations are resource intensive for both the IRS and taxpayers and that if the facts of the case show that the taxpayer's results fall within an appropriate arm's-length range, then our resources should be applied elsewhere."

Similarly, teams should continuously evaluate opportunities for taxpayer issue resolution throughout the examination process, according to her.

Because of R&D tax credits and other provisions to reduce corporate income taxes, many significant US companies, including Amazon, FedEx, and Oracle, pay a tax rate below the headline corporate tax rate of 21%.

The head of tax notes that while the overall number of audits will rise over time, large corporate taxpayers will experience a greater increase in audit percentage than small business taxpayers.

There should be several opportunities to improve the audit process for both taxpayers and authorities thanks to the infusion of $80 billion in funding. Long-term pressure on large taxpayers, however, could result from the results. Soon, more IRS agents will begin checking their tax returns for new compliance gaps and logging more of that information internally.

By fLEXI tEAM