The Internal Revenue Service’s Strategic Operating Plan to Spend $79 Billion in Inflation Reduction Act Funding

The Internal Revenue Service’s Strategic Operating Plan to Spend $79 Billion in Inflation Reduction Act Funding

Updated June 2, 2023
The Internal Revenue Service’s Strategic Operating Plan to
Spend $79 Billion in Inflation Reduction Act Funding
The Inflation Reduction Act (IRA, P.L. 117-169) provided
payments digitally; and to expand online account services
the Internal Revenue Service (IRS) with $78.9 billion in
for businesses and tax professionals.
mandatory funding that is available for obligation through
FY2031. Of this amount, the act specified that $45.6 billion
In addition, the IRS plans to offer legal guidance to
(58%) would go to tax law enforcement, $25.3 billion
taxpayers on more questions, including clarifying
(32%) to operations support, $4.8 billion (6%) to the IRS’s
ambiguities in the tax code that can cause taxpayer error
business systems modernization (BSM) program, and $3.2
and encouraging those who are eligible for tax credits and
billion (4%) to taxpayer services.
deductions to claim them.
Shortly after the IRA’s enactment, the Department of the
There are some signs that the IRS is making progress in its
Treasury promised to deliver to Congress by mid-February
IRA-funded efforts to improve taxpayer services. The
2023 a report detailing how the IRS intended to use the IRA
agency claimed it answered 87% of taxpayer calls during
funding. The report, delivered April 6, 2023, sets forth five
the 2023 filing season, thanks to the hiring of 5,000
key objectives for using the funds and a variety of
customer service representatives using IRA funds.
initiatives and projects for accomplishing them.
Further success could depend, in part, on whether the IRS
This In Focus looks at the IRS’s strategic operating plan’s
can hire, train, and retain qualified individuals and integrate
(SOP’s) objectives and how the IRS intends to achieve
certain planned improvements in its business information
them. It also discusses potential obstacles to realizing the
systems with new taxpayer service options in a timely
objectives.
fashion.
Objective 1: Provide Taxpayers with the
Objective 2: Quickly Resolve Taxpayer
Prefiling Services They Want and Need
Issues
The IRA provided $3.2 billion for IRS taxpayer services
According to the SOP, the IRS plans to use some of the
such as filing and account services, prefiling assistance, and
IRA funds for taxpayer services to make its efforts to
education. This funding is intended to allow the IRS to
resolve taxpayer issues timelier. Recent backlogs in
make substantial improvements in how it interacts with
responding to taxpayer correspondence have increased the
taxpayers who have questions about their tax obligations.
pressure on the IRS to streamline its case resolution
The IRS answered between 18% and 19% of taxpayer calls
processes.
during the 2020 and 2021 filing seasons, down from 59% in
2019.
The IRS had 2 million pieces of correspondence awaiting a
response at the end of the 2019 tax-filing season. For
Under the SOP, the IRS intends to expand digital options
reasons mainly related to the COVID-19 pandemic, the
that would let taxpayers and tax professionals receive
backlog grew to 5.9 million pieces at the end of the 2021
support in their preferred medium—digitally, by phone, or
season. The IRS had reduced the backlog to 4.5 million
in person. Taxpayers would also have more options to
pieces as of November 2022. According to a 2021 Taxpayer
prove their identities, allowing them to access more
Experience Survey conducted by the IRS, nearly 60% of
services without needing to reconfirm. More tax forms
respondents reported that they had an issue that required
could be filed digitally. As part of the IRA, the IRS is also
IRS assistance to resolve but had trouble reaching anyone at
exploring the feasibility of creating a direct-file tax
the agency.
preparation service.
With the IRA funding, the agency hopes to expand prefiling
According to the SOP, the IRS plans to put all of a
assistance programs. This could include identifying issues
taxpayer’s interactions and tax history in a centralized
with taxpayers’ filings—such as missing forms, math
information system, which would enable staff to respond to
errors, or missing income reported by third parties—and
taxpayers’ questions more knowledgably. To improve ease
notifying taxpayers or preparers about how to resolve the
of use for taxpayers, transcripts and taxpayer account data
issues. Doing so could prevent many taxpayers from having
would be written in plainer language and available in
to file an amended tax return.
languages besides English. Planned improvements in
information systems would also enable taxpayers to track
The SOP also specifies that the IRS intends to make greater
the status of their returns, refunds, audits, and other
use of data analytics to help the agency better tailor its
interactions with the IRS in real time; to make more
taxpayer services. Areas in which the IRS says it intends to
apply more advanced analytics include recognizing and
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The Internal Revenue Service’s Strategic Operating Plan to Spend $79 Billion in Inflation Reduction Act Funding
remedying taxpayer errors, detecting nonfilers and
languages from the 1960s. In a 2023 report, the
underpayers so the agency can expand outreach to them,
Government Accountability Office found that such systems
and identifying taxpayers well suited to installment
generally pose security risks, impede the achievement of an
payment plans or other debt resolution programs.
agency’s mission, can be difficult to maintain owing to a
shortage of workers with the requisite knowledge, and are
Objective 3: Expand Efforts to Improve
increasingly costly to operate and maintain.
Tax Compliance by Certain Groups
Congress dedicated the majority of the funds for the IRS in
The SOP calls for a variety of initiatives to accomplish the
the Inflation Reduction Act—$45.6 billion—to bolstering
IT modernization objective by FY2028. These include
enforcement of the tax code. This was a response to recent
updating programming language for the individual and
declines in the agency’s enforcement budget.
business master files, replacing legacy databases,
Appropriations for tax enforcement fell by 26% in inflation-
implementing a standard case management platform, and
adjusted dollars from FY2010 through FY2022, leading to
migrating more data to a modern cloud architecture.
significant declines in audit rates for taxpayers thought to
account for a major share of an estimated $500 billion
Objective 5: Hiring, Training, and
federal tax gap, which is the difference between federal
Retaining a Talented and Diverse
taxes owed and federal taxes paid in full and on time.
Workforce
This SOP objective addresses a critical ongoing need for
The SOP notes that the IRS intends to use these funds to
the IRS: adequate staffing with the knowledge and skills to
expand enforcement for large corporations, partnerships,
allow the agency to carry out its mission effectively and
and filers with high incomes or large wealth, and for other
efficiently.
“areas where audit coverage has declined” in recent years.
Such areas include employment taxes, excise taxes, and
Underlying the objective are several worrisome recent
estate taxes. IRS Commissioner Daniel Werfel has told
trends in IRS employment and anticipated attrition in the
Congress that the IRS would hold the audit rate for
IRS workforce in the next few years. Between FY2010 and
taxpayers with incomes below $400,000 to 2018 levels “for
FY2022, the IRS’s workforce decreased by almost 10,000
at least several years.” The agency also plans to pursue
employees (a decline of 10%); employees involved in
what it calls “appropriate enforcement” for emerging tax
examinations and collections fell by almost 16,000 (a 33%
issues, such as complex international taxation and digital
drop). According to the IRS’s FY2024 budget request, 63%
assets including cryptocurrency. To achieve these goals, the
of current IRS employees are eligible to retire between
IRS intends to hire additional staff, centralize its
FY2023 and FY2028; the agency expects to lose more than
compliance programs, and use more data analytics to target
8,000 employees a year in both FY2023 and FY2024.
its enforcement efforts more cost effectively.
The SOP does not specify a hiring goal through FY2031.
Objective 4: Deliver Cutting-Edge
Instead, it sets forth ways in which the IRS might meet its
Technology to Operate More Effectively
anticipated workforce requirements in the next few years.
The IRA provides $4.8 billion in mandatory funding for the
The plan calls for offering higher pay for individuals with
IRS’s BSM program. This objective is arguably central to
knowledge and skills in great demand; recruiting from
the entire plan. As explained in the SOP, modernized
diverse and underrepresented talent pools; and streamlining
information technology (IT) systems will serve as the
a time-consuming hiring process that can dissuade
foundation for the planned improvements in taxpayer
candidates from joining the IRS. Accomplishing the SOP’s
services and enforcement results.
other objectives could require the IRS to hire tax
accountants, attorneys, software engineers, and other
Upgrading its information systems is hardly a new goal for
experienced, skilled professionals.
the IRS. Since the late 1960s, the agency has launched a
number of programs intended to improve its information
Recent IRS hiring efforts suggest that hiring and retaining
systems to enable the IRS to more effectively and
enough individuals with the requisite skills and knowledge
efficiently help taxpayers understand and meet their tax
may be difficult. The IRS has long struggled to compete
obligations, and to increase tax compliance among major
with the private sector for talented individuals, especially
contributors to the federal tax gap. Most of these programs
tax auditors and certain IT specialists. One reason has been
were marred by cost overruns and extended delays in
limits on the pay the IRS can offer job candidates. To skirt
delivering intended system enhancements.
that barrier, the agency is seeking streamlined critical pay
authority in its FY2024 budget request to allow the IRS to
The IRS’s current IT modernization program stems from a
offer higher salaries to persons with critical skills that are in
business plan it released in April 2019. The plan identified
short supply.
projects to be carried out through FY2024 aimed at
improving taxpayer services, bolstering enforcement,
Brendan McDermott, Analyst in Public Finance
making agency operations more efficient, and enhancing
Gary Guenther, Analyst in Public Finance
cybersecurity and data protection. The program does not
address the replacement of the IRS’s legacy information
IF12394
systems, which mostly operate with programming

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The Internal Revenue Service’s Strategic Operating Plan to Spend $79 Billion in Inflation Reduction Act Funding

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https://crsreports.congress.gov | IF12394 · VERSION 3 · UPDATED