Last month, the IRS released a plan for how the agency plans to spend nearly $80 billion in funding granted through the Inflation Reduction Act passed in August.
"Now that we have long-term funding, the IRS has an opportunity to transform our operations and provide the service that people deserve," IRS Commissioner Danny Werfel said on a press call.
Not so fast, though. House Republicans on Wednesday released their first crack at a plan to raise the debt ceiling, known as the Limit, Save, Grow Act. The Democrats have declared the legislation a non-starter, and given Democratic control of the Senate and the White House, the Republican bill is highly unlikely to advance.
But the proposal does make clear the sort of concessions Republicans will be looking for in order to agree to raise the amount the government is allowed to borrow. Among them: rolling back the new funding to the IRS.
So what's the IRS spending the money on anyway? One thing the agency recently clarified, is that the money won't be spent to hire an "army" of armed auditors, as some politicians have claimed.
Here's what's going on.
The IRS is already spending
The IRS has already started using a portion of the appropriation to beef up customer services. The agency hired 5,000 phone assistors in advance of this year's filing season and made technological upgrades, such as allowing taxpayers to respond online to certain IRS notices.
As a result, Werfel reported, the agency is answering 80% to 90% of its phone calls this year compared with only 17% during fiscal year 2022. What's more, phone wait times have dropped to four minutes on average this year — down from 27 minutes in April in 2022.
The IRS has further plans to update its technology, allowing taxpayers to more easily identify mistakes before filing and resolve errors on their returns. The agency also plans to move to a "fully digital correspondence" to eliminate its paper backlog.
More audits for wealthy filers
The biggest sticking point in the funding plan is IRS efforts to close the $600 billion "tax gap," the difference between what Americans owe and what they actually pay. To that end, the agency plans to higher more staff in order to ramp up auditing efforts on wealthy families, large corporations and business partnerships.
"They keep saying over and over that taxpayers who make less than $400,000 will see no increase from the historical level of audits," says Bill Smith, national director of tax technical services at CBIZ MHM. "The number is extremely low — under 1% of returns."
The IRS still needs to work out exactly what that $400,000 threshold means, Smith says. "The issue is the word 'make.' It's easy if you have a W-2 filer. But what happens if someone has well over $400,000 in investment income but they realize investment losses, so their taxable income goes under the threshold?"
It's unclear. What is clear, Smith says, is that corporations are likely to receive the "majority" of the uptick in IRS scrutiny.
The IRS isn't adding thousands of armed personnel
What's also clear to Smith is that conversations over an "army" of new IRS agents amounts to little more than political hand-wringing. "We have to dispel the notion that anybody is showing up at your door with weapons drawn," he says.
An oft-quoted figure when it comes to this wave of IRS funding — 87,000 new agents — doesn't come from the Inflation Reduction Act at all. Rather, it's an estimate from a 2021 Treasury Department report for how the IRS could "rebuild" and "revitalize" the agency over the next decade in the wake of an aging staff that's set to undergo a wave of retirements.
In a Thursday hearing in front of the House Ways and Means Committee, Werfel told representatives that the IRS Criminal Investigations Division would hire additional staff authorized to carry weapons, but that this division did not conduct audits. He confirmed that the IRS plans to hire about 360 agents per year for the next five years, for a net gain of 1,200 with retirements.
"Our CI division or Criminal Investigation Division, they do not conduct audits," Werfel said. "What they do is, they are investigating acute issues of fraud and tax evasion. And typically, they're armed when they're putting themselves in danger."
The division currently makes up about 3% of IRS staff.
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