Key Highlights:

• $80 Billion Boost: The Inflation Reduction Act of 2022 allocates $80 billion to the IRS over the next 10 years, marking the largest increase in the agency’s history.
• Impact on Taxpayers: While the funding aims to improve IRS operations and services, it also means greater scrutiny for higher earners and specific tax areas.
• Enhanced Enforcement & Services: With a focus on taxpayer services, enforcement, and IT modernization, the IRS is preparing for more audits and quicker processing.

How the $80 Billion Will Be Spent

The $80 billion funding is broken down into key areas: - $3.18 billion for improving taxpayer services (including hiring 5,000 phone representatives). - $45.64 billion for enforcement, aiming to increase audits and collections. - $25.33 billion for operations support, focusing on modernizing IT systems. - $4.75 billion for business systems modernization.

This funding is a mandatory appropriation, meaning it can’t be reduced without new legislation. The IRS is expected to gradually phase in the budget, reaching up to $15 billion per year by the 10th year.

IRS Growth and Staffing

The IRS has seen a decline in its workforce over the past decade, losing around 18.5% of its budget and 20% of its employees. By 2021, the IRS had only 78,661 employees, down from over 116,000 in 1992. This new investment aims to offset the attrition and slowly rebuild the workforce. The IRS anticipates needing to replace over 52,000 employees over the next six years, which could result in an increase of 20,000-30,000 employees by 2031.

However, the 87,000 new agents often mentioned is an exaggeration. Most new hires will be used to fill vacancies and not drastically increase the workforce.

Will Audits Increase?

Yes. Treasury Secretary Janet Yellen has promised that audit rates will stay at historical levels for taxpayers earning under $400,000. While this term is vague, it likely means a potential increase of audits for lower-income individuals, though still at low levels.

For those earning over $400,000, expect significant increases in audits. The IRS expects to raise $124 billion over the next 10 years through enhanced enforcement.

Key Areas to Watch

With the IRS’ renewed focus on enforcement, there are several areas where taxpayers should be particularly careful:

• Cryptocurrency: The IRS is paying close attention to cryptocurrency transactions. If you bought, sold, or received cryptocurrency in 2022, be sure to report it accurately. The IRS has added new questions on Form 1040 related to digital assets, signaling increased scrutiny.
• S Corporation Compensation: IRS audits of S Corporations may increase, especially if you are paying yourself a low salary to avoid payroll taxes. Ensure that your compensation is reasonable and well-documented.
• Syndicated Conservation Easements: The IRS is cracking down on these real estate partnerships that use inflated appraisals to claim large tax deductions. If you’re involved in these types of transactions, be aware of the risk of audit.
• Offshore Accounts: If you have over $10,000 in foreign accounts, ensure you file an FBAR (Report of Foreign Bank and Financial Accounts). The IRS has aggressively targeted offshore tax evasion and will likely continue doing so with more resources.
• Business Partnerships: Partnerships and LLCs taxed as partnerships are expected to face greater scrutiny. With the launch of the Large Partnership Compliance (LPC) program, the IRS is using data analytics to audit high-value business partnerships.

What This Means for You

For most taxpayers, the primary benefit will be better service from the IRS. You can expect quicker processing of tax returns, better phone service, and an overall improvement in operations. However, higher earners or those involved in more complex tax situations should prepare for increased scrutiny.

If you’re an S-Corp owner, a cryptocurrency investor, or involved in offshore transactions, ensure your records are complete and your tax filings are accurate.

Takeaways:

• The IRS will receive an $80 billion funding boost, focused on enforcement and service improvements.
• Audit rates are expected to rise, particularly for those earning over $400,000 and in areas like cryptocurrency and business partnerships.
• The IRS will hire more staff, though not the exaggerated 87,000 agents often reported.

Stay Prepared: The best defense against a potential audit is ensuring your records are accurate, your filings are timely, and you’re fully compliant with tax laws.

Stay tuned for future updates as we monitor how the IRS’s expansion unfolds. For any specific questions about your tax situation, feel free to reach out to a tax professional.