Tax Audit Representation, The Inflation Reduction Act of 2022: Items to Consider


In the last 10 years the Internal Revenue Service (IRS) has had an average annual budget of approximately $13 billion, adjusted annually for inflation. Now, however, the Inflation Reduction Act of 2022 (IRA 2022) is set to increase the IRS’s budget by $79 billion over the next 10 years, or 60% more than what it’s received the last 10 years. The funds will be provided over a 10-year period and used to enhance enforcement functions, operations support, information technology upgrades, and taxpayer services.

Based on the May 2021 Treasury Department report that the IRS could hire nearly 87,000 new staff with an $80 billion appropriation, coupled with nearly $46 billion of the $79 billion IRA 2022 appropriation being allocated to enforcement functions, some speculated that the IRS would be doubling its current workforce (currently at approximately 79,000) and that audit rates would sharply increase. At an American Institute of Certified Public Accountants (AICPA) event, however, then-soon-to-be acting IRS commissioner Douglas O’Donnell stated that although the IRS will look to increase its workforce, “it is not possible to double the workforce in any component of our organization, at any size. It’s not going to happen.” Indeed, the IRS expects to lose approximately 50,000 of its current employees through retirement and other departures in the next five to six years.

Additionally, former high ranking IRS officials point out that a portion of what is classified as “enforcement” is really taxpayer service, such as interactions between the IRS and a taxpayer who received a collection notice. While technically part of the enforcement process, these interactions are generally viewed as a form of service. Similarly, more than two-thirds of IRS audits are correspondence audits. When taxpayers write or call the IRS during such audits, the IRS employees who respond are working the enforcement function, but they’re really providing a service.

So, Will Audit Rates Increase? It Depends

Treasury Secretary Janet Yellen has directed that enforcement resources should not be used to raise audit rates relative to historical levels for households making under $400,000 a year (which makes up slightly more than 98% of households). Instead, funding from IRA 2022 will go toward increasing audit rates for higher earners.

The Focus Of Extra Staff Will Be On Customer Service, Not Audits

O’Donnell said the primary focus is taxpayer service, with improvements to be made for both taxpayers and their professional representatives. For example, Yellen has requested the IRS achieve an 85% level of service in answering phone calls — up from an estimated 10% during the 2021 filing season — by hiring 5,000 more customer service representatives.

While staffing has indeed been an issue, part of the problem also appears to be auto-dialing services, which charge a fee to hold spots in line — and monopolize the queue in the process. The IRS has already taken measures to curtail such services using an artificial intelligence based tool, but much like the cat and mouse game legislators play with those who find and exploit loopholes, the IRS is constantly deploying countermeasures to the auto dialing services’ tactics.

The Bottom Line

All taxpayers should expect a welcome increase in customer service, especially when it comes to telephone assistance. Whether that softens the blow for the top 1-2% of earners who should expect their chances of being audited to increase remains to be seen.

Where can I find more information?

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Author: Marcum Accountants & Advisors
Article Title: The Inflation Reduction Act of 2022: Do More Agents Equal More Audits?
Publisher: Marcum Accountants & Advisors
Date: Nov 2022