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Inflation Reduction Act Will Restore IRS Staffing To 1995 Level By 2026

It is not too often that regular participants in #TaxTwitter create a youknow-storm on Twitter, but Adam Markowitz EA managed it with this gem.

It is not as bad as telling a bunch of Tolkien fans that you expect that the upcoming Amazon Series is going to better than the original books and Peter Jackson’s not so bad movie adaptation, but it is a bad enough.

The response included some very hateful stuff, that has been pretty much purged from Twitter.. Adam sent me samples and also some of the messages that came into his firm’s website. It was really nasty stuff. What is left are things like “How about abolish the IRS” and “I sincerely hope you get audited for the next five years” and “Lois Lerner”, My favorite is one that you have to be in the business to fully appreciate.

I think it is safe to say that an Enrolled Agent who wants to continue in the tax field in a practice that serves individuals and small businesses will not improve their capacity to serve clients by becoming a CPA. Apparently Adam’s father who is a CPA and is turning the practice over to him agrees. Seriously, Enrolled Agents do not get enough respect says this guy who will have been a CPA forty years before the next license renewal comes around.

#TaxTwitter is one of the more congenial supportive places on the internet and Adam found some support there, perhaps the best coming from Andrea Carr CPA.

About Those 87,000 Agents

I was struggling to find the actual source of the additional 87,000 agent story that is floating around. My concern was that it did not seem to jibe well with the dollars. I found the number 86,582 in a Treasury Report cited by Americans for Tax Reform. It is on Page 16.

The first step in the President’s efforts to restore IRS enforcement capability is a sustained, multi-year commitment to rebuilding the IRS. This involves spending nearly $80 billion on IRS priorities over the course of the decade including hiring new specialized enforcement staff, modernizing antiquated information technology, and investing in meaningful taxpayer service—including the implementation of the newly expanded credits aimed at providing support to American families.

Importantly, the additional resources will go toward enforcement against those with the highest incomes, and audit rates will not rise relative to recent years for those earning less than $400,000 in actual income

The 86,582 FTE is total additional headcount not just agents. And it is projected for 2031. Increased staff for 2022 would be 5,197 ramping up to the 86.582 over the years. Nobody seems to question that the “service” piece of IRS has plummeted. And most people would like to see that fixed. It does not bother many people that audit coverage is way down, but in the long run, which we may already be at, it has a demoralizing effect on compliance.

How Lack Of Enforcement Creates Problems

You might want to take a look at the Lost Horizons site run by Cracking The Code author Peter Hendrickson. Mr. Hendrickson has a theory that most of what we consider income is not really subject to the income tax. The IRS tricks us into paying it even though they know we don’t really owe it. I find Mr. Hendrickson’s argument altogether unpersuasive as does the United States Tax Court. What he throws back at me are the number of documented refunds that you can find on his site. He believes that my argument that the stuff goes through because the IRS does not have the capacity to examine it is preposterous.

And then there is the matter of collections. There are people who owe without dispute and no action is taken to collect beyond sending occasional notices. After ten years they are olly olly oxen free. At the end of the 2010 Fiscal Year IRS wrote off $14.6 billion as expired. At the end of 2019 $34.2 billion was written off as expired.

This long term decline in both service and enforcement corresponds to a reduction in the number of people working for the IRS. In 1995 they were using 113,643 FTE. By 2019 they were down to 74,369. For 2021 they used 80,411. Had the IRS workforce grown in proportion to the US population since 1995, it would be over 140,000.

Projected rates of population growth suggest that the 1995 equivalent IRS workforce would be about 150,000 in 2031. So maybe adding 87,000 is going to far, but we can probably hold off on worrying about that until around 2026 when they will be back to the 1995 level unadjusted for population growth.

From An Old Hand

I asked Lu Gauthier who runs the Boston Tax Institute for his thoughts. Lu is a lawyer and a CPA and offers continuing professional education through BTI. Full disclosure I am on the BTI faculty. How long has he been at it? Well he used to joke that the Tax Reform Act of 1969 great devalued his LLM in Taxation.

On Sunday (08/07), the Senate passed the Inflation Reduction Act of 2022 on a 51-50 vote. The House is expected to vote on the legislation on 08/12. The legislation gives the IRS $79.6 billion over 10 years with more than one-half of that amount earmarked to enforce the tax laws involving corporations and high net worth individuals. For more than 10 years, the IRS was starved to death by those wanting a smaller government, and then the IRS caught COVID and was put on a ventilator. Among its various problems, the Service still has millions of unprocessed tax returns; but soon it will be given the money it needs to accomplish its mission which includes increasing the audit rate for large corporations and taxpayer making more than $400,000 per year. Practitioners should heed this development and advise their affluent clients accordingly!

I do have to disagree with Adam’s comment that honest tax returns are bullet proof on audit. It is probably true for the majority of people, but if you have complex affairs there will always be things that can be viewed differently. And dealing with an audit can be quite burdensome. That’s why you want to get an Enrolled Agent to help you out or maybe even a CPA.