Overview
The Inflation Reduction Act (IRA) provides almost $80 billion in additional funding for the Internal Revenue Service (IRS) over the next ten (10) years. Of the $80 billion, more than half is allocated towards enforcement activities. Assuming no changes in the base appropriations, the IRA would raise enforcement funding by 69% relative to current projections.
According to Congressional Budget Office (CBO) estimates, the $80 billion in additional funding for enforcement is expected to raise an additional $204 billion in revenue over the next 10 years, for a net savings of $124 billion.1 CBO estimates the IRS will increase spending by about $5 billion in 2023 and scale up to almost $15 billion by 2031.2
In a letter to the Senate on August 4th, IRS Commissioner Charles Retting stated the additional funding provided by the IRA will not be used "for increasing audit scrutiny on small businesses or middle-income Americans".3 Instead, Retting claimed, the additional funding will be targeted towards "large corporate and high-net-worth taxpayers, as well as pass-through entities and multinational taxpayers with international tax issues."4
Additional Funding
Enforcement - $45.6 billion
For tax enforcement activities such as providing legal and litigation support, conducting criminal investigations, investing in investigative technology, providing digital asset monitoring and compliance activities, and enforcing criminal statutes related to violations of internal revenue laws and other financial crimes.
Taxpayer Services - $3.1 billion
To provide taxpayer services, including pre-filing assistance and education, filing and account services, taxpayer advocacy services, and other services as authorized by 5 U.S.C. § 3109.
Operations Support - $25.3 billion
For necessary expenses of the IRS to support taxpayer services and enforcement programs, including rent payments; facilities services; printing; postage; physical security; headquarters, and other IRS-wide administration activities. The funding will also be used for the enhancement of telecommunications and information technology. Further, the funds can be used for Internal Revenue Service Oversight Board operations.
Business Systems Modernization - $4.7 billion
Additional funds to be used to invest in customer service technology such as automated callback systems for phone lines, but not used to operate legacy systems.
United States Tax Court - $153 million
For necessary expenses of the Tax Court, including contract reporting and other services as authorized by 5 U.S.C. § 3109.
Treasury Offices - $557.5 million
In addition to the IRS funding, the IRA also provides $403 million in additional funding for the Treasury Inspector General for Tax Administration, $104.5 million for the Office of Tax Policy for implementing regulations, and $50 million to the Treasury Departmental Offices.
Impact of the IRA
With the uptick in resources and funding for the IRS provided by the IRA, we expect an increase in examination activity as the IRS begins to use these additional resources.
After President Biden signs the bill into law, we further expect IRS and Treasury to engage in a number of rulemakings to implement the new legislation, particularly around the new corporate minimum book tax.
Endnotes
1 Congressional Budget Office, Summary Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022 (August 5, 2022), https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf
2 Id.
3 See Letter to Members of the United States Senate from Charles P. Retting, Commissioner, Internal Revenue Services (August 4, 2022), https://www.irs.gov/pub/irs-utl/commissioners-letter-to-the-senate.pdf.
4 Id.
