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IRS Eyes Hurdles, Prepares to Spend $80 Billion Funding Increase

Aug. 11, 2022, 8:45 AM

The IRS is on the cusp of realizing a long-held dream: a significant increase in funds that it can use over nearly a decade.

The agency, however, will face challenges as it spends the money.

The IRS will have to recruit and train thousands of employees who have the necessary skills to audit high-income taxpayers and corporations, as well as those who are able to upgrade the agency’s technology. The agency also will need to be careful to be responsible and transparent with the funds, or it risks further damage to its already-challenged public perception.

“It’s a wonderful problem to have,” said John Koskinen, who served as IRS commissioner from 2013 to 2017.

An $80 Billion Infusion

The tax, climate, and health-care package passed by the Senate on Sunday would provide the IRS with nearly $80 billion that it can use through Sept. 30, 2031. The House is expected to pass the bill Friday, and President Joe Biden is expected to sign it into law.

The bulk of the funds are designed to be used to increase enforcement efforts against wealthy taxpayers and corporations, though portions of the money pertain to taxpayer services and technology improvements. The bill includes $46.5 billion for enforcement, $3.2 billion for taxpayer services, $4.8 billion for business systems modernization, and $25.3 billion for operations support.

The funding has long been desired by the IRS, which has cited limited resources as the cause of declining audit rates. The IRS also has long sought multiyear funding, saying it’s hard to modernize agency technology when funds are subject to the annual appropriations process.

Current and former government officials said the multiyear funding should allow the IRS to enter into longer-term contracts regarding its information technology, giving it more certainty.

The IRS has been making preparations over the past year-and-a-half so that it can start deploying the funds. The agency also plans to publicly release an operational plan about how it intends to use the resources, according to Natasha Sarin, a top tax policy official at the Treasury Department.

The new funds come at a time when taxpayers have encountered many frustrations with the IRS, including lengthy wait times for paper tax returns to be processed and difficulty reaching agency representatives on the phone.

Sarin said the IRS will quickly use some of the funds to improve the service taxpayers get when they call, as well as to enhance the ability for taxpayers to communicate with the agency online.

Recruitment Challenges

One of the biggest challenges for the IRS as it seeks to utilize the funds will be recruiting and training employees.

A big portion of the funds is expected to be used for hiring. Treasury estimated last year that the funds would allow the agency to hire over a 10-year period approximately 87,000 employees, a figure that includes enforcement personnel as well as employees performing other functions. The estimate represents a gross number of hires, and the IRS also is expected to lose 50,000 current employees to attrition over the next decade, Sarin said.

A Treasury official said most of the new hires that go beyond replacing departing employees will concentrate on taxpayer services.

The IRS will need to be able to bring on board people with the skill set to conduct enforcement efforts, while contending with the fact that it can’t pay as well as the private sector. And once qualified enforcement employees are hired, they will need a considerable amount of training.

Sarin said the IRS already has been having conversations about how the agency will go about recruiting and hiring people who are capable of auditing partnerships and high-net-worth taxpayers.

Charles Rossotti, who served as IRS commissioner from 1997 to 2002, said he’s hopeful that the long-term nature of the funding will entice people to work for the IRS and help rebuild it.

“I am optimistic that the IRS can attract those people,” he said.

David Kautter, who was acting commissioner from 2017 to 2018, said the IRS should try to target early-career workers who might find the agency an appealing place to work because they will learn a great deal about the tax code, as well as late-career workers who are looking for a way to give back.

“I think their best approach is to get people at the beginning of their career and at the end of their career,” he said. “I think the mid-career hires are exceedingly difficult to get.”

The initial version of the bill released by Senate Democrats last month included provisions for an expedited hiring process as well as higher rates of pay for a limited number of employees.

Those provisions weren’t in the version the Senate passed, because of budget rules in the chamber, but it’s possible the IRS could get more hiring flexibility in the future either administratively or through subsequent legislation.

Need for Transparency

Former IRS officials said it will be crucial for the IRS to keep Congress and the public abreast of how it is spending the money.

If a future Congress thinks the funds are being mismanaged, or if the IRS isn’t adequately communicating how it is spending the funds, lawmakers could seek to reduce the amount or reduce how much the IRS receives in annual appropriations.

The tax, climate, and health-care package lacks any Republican support, and GOP lawmakers have made the IRS funding one of their main targets of criticism of the bill.

Transparency from the IRS could help reassure the public that the money is being spent in ways that will be beneficial, former National Taxpayer Advocate Nina Olson said.

“That, to me, will dispel some of the fear-mongering that’s going on,” said Olson, who now is executive director of the Center for Taxpayer Rights.

Mark Everson, who was IRS commissioner from 2003 to 2007, said the agency should move cautiously on spending the money because lawmakers will be closely scrutinizing the agency’s actions.

“It’s better to move more slowly and deftly than it is to just move too quickly and generate missteps,” he said.

Former IRS officials said it’s important for the agency to consult with stakeholders in the process of spending the money. Olson and several others said it would be helpful if the IRS Oversight Board were revived so the agency received regular feedback and monitoring from people with private-sector experience.

“I think it really needs to be reinstated, and it needs to be focused on what the IRS is doing with this money on all fronts,” Olson said.

To contact the reporter on this story: Naomi Jagoda in Washington at njagoda@bloombergindustry.com

To contact the editors responsible for this story: Rachael Daigle at rdaigle@bloombergindustry.com; Butch Maier at bmaier@bloombergindustry.com