Tax season is over: Next – Catching up with IRS news
Prior to the federal tax return filing deadline of April 18, 2023, the IRS was busy processing taxpayer tax returns and extensions of time to file.
As of April 7, 2023, the IRS had received 101,320,000 returns and processed 100,367,000. Compared to about the same time last year, there were more returns received (103,315,000), but fewer that were processed (99,785,000).
The IRS also handled 420,715,000 visits to the IRS.gov website, as of April 7, 2023, compared to 531,901,000 in April 2022.
In addition to processing tax returns and handling website visits, there was plenty of other important recent activity at the agency – including confirmation of a new commissioner, action regarding increased IRS funding, the likelihood of post-filing season routine tax notices, and solicitation of members to the IRS advisory council.
Daniel Werfel confirmed as commissioner of the Internal Revenue Service
On March 9, the Senate confirmed Daniel Werfel as the 50th commissioner of the IRS. Prior to his appointment as IRS commissioner, Werfel was a managing director and partner at Boston Consulting Group. He has prior government experience including working at the Office of Management and Budget, as well as being acting IRS commissioner in 2013.
Since his confirmation, the new commissioner has been busy addressing tax scams identified by the IRS, including potentially fraudulent Employee Retention Tax Credit (ERC) claims (see our prior blog post-IRS to Scrutinize Employee Retention Credit Claims) and being involved with the unveiling of the IRS Strategic Operating Plan for the period from 2023-2031.
IRS Strategic Operating Plan / Status of $80 billion in additional IRS funding
On April 6, the IRS unveiled its Strategic Operating Plan. The 150-page report outlines the agency’s plans to make fundamental changes resulting from the $80 billion of additional IRS funding included in the Inflation Reduction Act of 2022. The IRS notice announcing the plan indicated that over the short and long term, the funding will be used to:
- Rebuild and strengthen IRS customer service activities, putting an end to long wait times on the phone, adding capacity to in-person taxpayer assistance centers around the country, and providing new online tools for those who want to engage with the IRS digitally.
- Add capacity to unpack the complex filings of high-income taxpayers, large corporations, and complex partnerships, addressing a growing chasm between the number of experienced compliance personnel at the IRS who audit high-income, high-wealth tax filings for compliance (about 2,600 employees) and the roughly 30,000 individuals making more than $10 million a year, 60,000 large corporations, and 300,000 large partnerships and S corps.
- Update various outdated systems in IRS core operations to help ensure the agency has the most modern and robust security in technology to protect taxpayer data.
The plan is organized around five objectives:
- Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
- Quickly resolve taxpayer issues when they arise.
- Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
- Deliver cutting-edge technology, data, and analytics to operate more effectively.
- Attract, retain, and empower a highly-skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
Published reviews of the plan have identified issues/concerns that might have been expected, but are not in the plan, including:
- No mention of 87,000 new agents who had been reported when the new funding was originally approved. In fact, there are surprisingly few actual statistics or numbers in the report.
- No special new technology, or single big spending items that often accompany major rollouts.
- No reallocation of the funding that was indicated in the IRA legislation, which is:
- $45.6 billion for enforcement,
- $25.3 billion for operations support,
- $4.8 billion for business system modernization and
- $3.2 billion for taxpayer services.
During the unveiling of the plan, Commissioner Werfel reiterated that the IRS will ensure that the agency follows Treasury Secretary Janet Yellen's directive not to raise audit rates above historical levels for small businesses and households making less than $400,000. Werfel emphasized that the agency is focused on pursuing high-income and high-wealth individuals, complex partnerships, and large corporations that are not paying the taxes they owe. According to Werfel, "The IRS has no plans to increase the audit rate for small businesses and households making less than $400,000."
In addition, the commissioner indicated that the agency is already working to resolve issues regarding a backlog of returns and the inability to reach the IRS.
"People can see the first signs of change this filing season following this infusion of funding," Werfel said. "Taxpayers and tax professionals can see the difference as we have dramatically improved our phone service thanks to more staff. More walk-in services are available across the country. New digital tools have been added. And these are just first steps."
Specifically, he noted that the IRS has already hired more than 5,000 new customer service representatives, and is beginning to hire approximately 650 new employees to work in Taxpayer Assistance Centers across the country. While the IRS has not been regularly picking up the phone for taxpayers, the agency has introduced a customer callback option for 75% of calls to IRS live assistance toll-free telephone lines, with plans to expand coverage to 95% of taxpayers calling by the end of July 2023.
Congressional and legislative challenges to the increased IRS funding
Although the additional IRS funding was included in the Inflation Reduction Act of 2022, there are ongoing efforts to either significantly reduce the funding or provide intense oversight regarding how the funding is administered.
The agency’s plans for spending the additional funding dominated the discussion at an April 27 House Ways and Means Committee hearing with Commissioner Werfel to consider the Biden administration’s fiscal year 2024 budget request for the agency, with expression of considerable concerns regarding the $45.6 billion allocated to enforcement.
In addition, the recently proposed debt ceiling bill – the Limit, Save, Grow Act - would rescind nearly $71 billion of the roughly $80 billion in mandatory spending made available to the Internal Revenue Service over 10 years as part of the Inflation Reduction Act, and redirect the remaining $9 billion to improving taxpayer services and technology infrastructure. It is important to note that the Congressional Budget Office (CBO) has estimated that rescinding the funding would, on net, increase the deficit by roughly $120 billion over the 10-year budget window through the combined effect of $191 billion in foregone tax collections and $71 billion in direct spending reductions.
While neither of these developments have any direct current effect on the approved IRS funding, the Ways and Means hearing was merely a discussion - and the Limit, Save, Grow Act has only been passed by the House and will likely not be approved by the Senate – the efforts to limit or reduce the IRS funding are real, and should continue to be monitored.
If the additional IRS funding is real, will my return be audited?
Other than Werfel’s reiteration that "the IRS has no plans to increase the audit rate for small businesses and households making less than $400,000”, it is hard to predict the future of IRS audits. However, in the apparently unlikely event that a normal taxpayer’s return will be audited due to increased enforcement funding, it is important to realize that the audit was more the result of the increased enforcement effort, and not likely result of taxpayer or return preparer errors.
Possibility of receiving a routine IRS notice
Often after the annual April tax filing date has passed, some taxpayers may receive tax notices from the IRS. In many cases, these are routine notices regarding matching information on returns, prior estimated tax payments, or minor penalties regarding late payments or return filings. However, receiving mail from the IRS can be scary, regardless of what the letter says. If you receive a notice from the IRS, please contact your Herbein advisor. Generally, you do not need to panic, and often, the notice is generated by a computer due to an error on the side of the IRS in processing the return.
Also, if the notice indicates an actual legitimate penalty, we may be able to assist in reducing or eliminating the amount of the penalty. There are two ways we can possibly request a waiver of an IRS penalty.
First Time Abatement
Failure to file, failure to pay, and failure to deposit penalties are all eligible for a First Time Abatement waiver if the taxpayer is considered compliant either in the past or currently, which means:
- Filed the same return type, if required for the past three years before the tax year you received the penalty
- Did not receive any penalties during the prior 3 years, or any penalty was removed for an acceptable reason other than First Time Abatement
- Filed all required returns or filed a valid extension
- Paid or have a valid payment plan in place to pay all taxes due for years other than the current year for which relief is requested
The IRS has a good system for the first-time abatement process and, if applicable, it can be accomplished easily with either a phone call to the agency or a letter written in response to a penalty notice.
The other option to First Time Abatement is requesting relief using reasonable cause. This is a fact and circumstances-based test. Examples of reasonable cause include serious illness, inability to obtain records, natural disasters, etc. This type of relief is requested via written letter to the IRS.
IRS seeks nominations for the 2024 Internal Revenue Service Advisory Council
Finally, if you have additional interest in the operations of the IRS, you may want to consider joining the Internal Revenue Service Advisory Council (IRSAC). The IRS recently announced that it is accepting applications for the 2024 IRSAC. Applications are accepted through May 31, 2023.
The IRSAC serves as an advisory body to the IRS commissioner and provides an organized public forum for discussion of relevant tax administration issues between IRS officials and representatives of the public.
The advisory council:
- proposes enhancements to IRS operations.
- recommends administrative and policy changes to improve taxpayer service, compliance, and tax administration.
- discusses relevant information reporting issues.
- addresses matters concerning tax-exempt and government entities.
- conveys the public's perception of professional standards and best practices for tax professionals.
IRSAC members are appointed to three-year terms by the IRS commissioner and submit a report to the commissioner annually at a public meeting.
The IRS is accepting applications for terms that begin in January 2024.
Nominations of qualified individuals may come from individuals or organizations. IRSAC members are drawn from diverse backgrounds representing a cross-section of the taxpaying public with experience in:
- tax preparation for individuals, small businesses, and large multinational corporations.
- tax-exempt and government entities.
- information reporting.
- taxpayer or consumer advocacy.
Applications should document the proposed member's qualifications. Applicants must be in good standing with their own tax obligations and demonstrate high professional and ethical standards. All applicants must apply and pass a tax compliance and practitioner check. For those applicants deemed "best qualified," FBI fingerprint checks are required.
If you have additional questions or concerns, please reach out to your Herbein team member through the form below.
Article contributed by Barry D. Groebel