For nearly a decade Congress has been “punishing” the IRS with budget cuts, and many observers are concerned about the agency’s ability to enforce the tax code. Since 2010, funding to the IRS has fallen by over 20 percent, and overall the audit rate dropped by nearly half – an ominous sign that needs immediate attention.
However, there have been signs of at least a modest turn-around recently. With the most current members from the IRS indicating that it raises $100 for every 34 cents it spends, cutting the IRS budget definitely punishes much more than just the IRS. Congress acknowledged this problem and would increase the base funding for the IRS from $11.1 to $11.5 billion in 2020 as a result. Most of the increase in the budget is aimed at modernizing the IRS IT infrastructure – especially its antiquated computer systems. These technology improvements are aimed at restoring and increasing the agency’s enforcement.
Additionally, the Administration is proposing $362 million more in funding for audits and collections in 2020. The budget not only assumes continuation of that funding over the next decade, it also calls for additional funding for enforcement each year through 2024 and would sustain that financing through 2029. These investments in the enforcement budget, the proposal said, totaling $15 billion over multiple years, would generate about $33 billion in new revenue over the next decade.
Furthermore, Commissioner Rettig seems to be applying his best effort to restore morale among IRS employees. The current IRS Commissioner says that the IRS is hiring again, and the agency is slowly recovering the number of enforcement staff to where it was a decade ago. The additional staff should help somewhat to reverse or at least put a break on the decline in enforcement activity reported in the most recent IRS statistics. Also helpful is the new Partnership Audit Regime enacted by Congress, making it easier for the IRS to focus its audit and collection efforts on the partnership itself rather than the individual partners.
Another promising sign for the IRS is that its collections have continued to increase even during the period of cutbacks. The IRS accomplishes this by focusing its collection activity where it produces the greatest results. The recent IRS efforts to focus on offshore income and accounts of U.S. taxpayers have also achieved considerable success.
As has been true in many other areas where the IRS has its special attention on, this endeavor has been facilitated primarily by improved access to third party information, in this case from foreign banks and financial institutions and increased cooperation from foreign governments. The IRS recently announced six new targets for its growing list of compliance campaigns:
- S Corporations’ built-in gains tax,
- Post Offshore Voluntary Disclosure Program (OVDP) compliance,
- High income non-filers,
- U.S. territories and erroneous refundable credits, and
- Code Sec. 457a deferred compensation attributable to services performed before January 1, 2009
The IRS does appear to have an upturn in its enforcement. Furthermore, the agency has shown its ability to do more with less over the last few years, and the improvement in technology due to additional budget funding should bolster that effort. And as we progress into the coming years, the agency may face a less hostile Congress. This would become key for the IRS to improve in terms of personnel, IT infrastructure and thus enforcement.
As it can be very expensive to taxpayers dealing with the IRS, we try our best to work with our clients to find the best approach possible in handling issues that may arise. If you have any questions regarding this topic and how it might impact you and your business or require any other assistance with your tax planning and compliance needs, please call or email one of our knowledgeable team members.