Tax news and developments April 2023
In April 2023, the IRS issued its Inflation Reduction Act Strategic Operating Plan (“Plan“), which describes how the IRS intends to use the additional $80 billion in funding for fiscal years 2023 through 2031 provided by the Inflation Reduction Act (IRA).
- What’s in the Plan?
- IRS technology will improve
- What can large businesses and high-income/high net worth individuals expect?
- Audit rates will increase
What’s in the Plan?
The Plan sets forth five objectives, which will be achieved through the various initiatives and projects described in the Plan:
- Dramatically improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
- Quickly resolve taxpayer issues when they arise.
- Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
- Deliver cutting-edge technology, data, and analytics to operate more effectively.
- Attract, retain, and empower a highly-skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
On 19 April 2023, recently-confirmed IRS Commissioner Danny Werfel testified before the Senate Finance Committee on the filing season, the President’s proposed budget for the IRS, and the Plan. Commissioner Werfel will also testify on these topics before the House Ways & Means Committee. In his Senate testimony, Commissioner Werfel noted that the IRS will create an IRS Transformation and Strategy Office to implement the Plan. He also promised to monitor progress on the detailed initiatives and projects identified in the Plan and provide regular updates to Congress. During his testimony, he reiterated Treasury Secretary Yellen’s previous pledge that audit rates will not increase for small businesses and individuals that make less than USD 400,000/year, relative to historic levels, and clarified that the reference to “historic levels” meant FY 2018 audit rates for these groups of taxpayers. He noted that, due to decreased staffing levels, audit rates in FY 2018 were depressed, compared to FY 2010 and earlier years when the IRS was more fully staffed. He suggested that, in future years, which fiscal year would be used as a reference point for “historic” audit levels may be adjusted.
Although the majority of the additional funding provided by the IRA is earmarked for enforcement, the Plan focuses on improvements to customer service (mostly targeted towards individuals) and technology upgrades. Furthermore, the Plan states that more staff will be hired in the IRS Office of Chief Counsel and Treasury’s Office of Tax Policy to increase the amount of guidance ─ both formal (like regulations) and informal ─ that will be published.
IRS technology will improve
When it comes to technological improvements, business taxpayers can expect to see:
- An increase in the types of forms that can be filed electronically (including employment tax forms filed by employers, which are currently filed on paper)
- An increase in “digital scanning” of forms that continue to be filed on paper (which should speed up processing times and reduce errors)
- The launch of “Business Online Accounts” in FY 2023, permitting businesses to securely manage their profiles and designees, view their balances and payment histories, make payments, and view account histories
- The retirement of outdated systems ─ like the Business Master File ─ and replacement of those systems with modern, cloud-based technology solutions
What can large businesses and high-income/high net worth individuals expect?
The Plan’s third objective ─ to “focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap” ─ identifies and describes the initiatives that are specifically focused on large businesses and high income and high worth individuals. The Plan states that the IRS intends to make a strategic shift in how it selects such taxpayers for audit by using “enhanced data and analytics to select compliance cases based on highest risk of noncompliance, and to choose enforcement actions predicted to be most effective.” The Plan suggests that case selection decisions will be made on a more centralized basis than they are now, and that future case selection methods will be refined to account for audit outcomes. In another strategic shift, the IRS intends to “increase capacity and expertise for enforcement,” which generally means that the IRS will hire more specialists ─ including data scientists, auditors, engineers, economists, and other specialists with industry or subject matter expertise. The additional hires will include Appeals officers and attorneys in the IRS Office of Chief Counsel, who will assist with expected increases in tax disputes and litigation resulting from expanded enforcement efforts.
Audit rates will increase
The Plan is explicit that, unlike small businesses and individuals making less than USD 400,000/year, enforcement activities for large corporations, large partnerships, and high income and high net worth individuals will increase and suggests that current audit rates are too low. For example, the Plan notes that, in 2011, the audit rate for large corporations was 10.5% and, in 2019, the audit rate for large corporations was 1.7%. Similarly, the Plan notes that the IRS has generally struggled to audit large partnerships, whose audit rate is around 0.05%. While the Plan does not indicate what the IRS believes to be an acceptable audit rate for large corporations and large partnerships, it is clear that such businesses can expect an increased audit risk in future years. For both large corporations and large partnerships, the IRS expects to start hiring additional staff in FY 2023 and rolling out its pilot programs for increased enforcement in FY 2025.
In addition, the IRS intends to increase enforcement activities for excise tax and employment tax issues, as well as “complex, high-risk, and novel emerging issues, including digital assets, listed transactions and certain international issues”. However, the Plan does not provide any other specifics on the types of issues that will see an increase in audit activity.
While the Plan contains some positive news for large businesses (almost exclusively related to proposed improvements in technology), the main takeaway for large corporations and partnerships should be that there will be an increase in both audit rates and the issues audited. Taxpayers would be wise to monitor the IRS’s efforts to implement the Plan and any further developments related to the Plan’s third objective.