top of page

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to communicate with taxpayers in an effective, timely manner, and a much-needed upgrade of technology that is decades out-of-date.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.