UPDATE ON IRS SPENDING PLANS

IRS Reveals Spending Plans for ITs Windfall

In April the IRS released its long-awaited Strategic Operating Plan for how it intends to spend the $80 billion in supplemental funding granted by the Inflation Reduction Act of 2022. The making of this plan was one of the first tasks charged to new Commissioner Danny Werfel after taking office. See IRS Publication 3744 (April 2023). 

The 146-page plan lays out how the funds are to be allocated and the timelines for accomplishing the various initiatives (discussed below). Ironically, the plan came just in time for Congress to cut $21 billion from the total appropriation under the budget deal struck by President Biden and House Speaker Kevin McCarthy in late May. 

McCarthy claimed that shaving the appropriation will stop the agency’s planned hiring of about 87,000 new employees over ten years. I don’t see how that can be the case, since the IRS will simply front-load its plans, then come back to Congress in future years to ask for more money. Still, House Republicans count the $21-billion claw-back as a win, despite the fact that they twice voted to cut $70 of the $80 billion appropriation.

The agency continues to sing the tune that none of the new enforcement weapons the IRS is amassing will be pointed at anybody earning less than $400,000 per year. Werfel parroted a statement made by former Commissioner Rettig last summer, saying that, “The IRS has no plan to increase the most current audit rate we have for households making less than $400,000.” Treasury Secretary Janet Yellen previously directed the IRS to not increase audit rates for households and small businesses making $400,000 or less, relative to historical levels.

But, there is the catch. Historically, small businesses and self-employed people have accounted for about 60 percent of the IRS’s audit and enforcement load. For details on this, see my article titled, “IRS to Get $80 Billion,” PTT, August 2022. That article includes a chart showing IRS Chief Counsel workload for tax year 2021. Per that data, the IRS’s Small Business and Self-Employed division generates 60 percent of the enforcement cases, while the remaining 40 percent is spread throughout the other fourteen categories of taxpayers. 

Strategic Operating Plan – Overview 

The Strategic Operating Plan sets forth the spending agenda, broken down into four broad categories: taxpayer services, enforcement, business systems modernization, and operations support. Note that the report has not been amended since the budget deal shaved $21 billion from the appropriation. But as I said, there is little doubt but that they will front-load the money for new employees, and come back to Congress for more money latter. 

The agency estimates it will spend $47.4 billion (the majority of the money) on enforcement. This includes $41.7 billion of the direct enforcement funds, $5.5 billion of the operations support funds, and $200 million of the taxpayer services funds. 

An estimated $4.3 billion is targeted at taxpayer services, $3.2 billion to problems resolution, and $12.4 billion on business systems modernization. Another $8.2 billion is pointed at employee hiring and retention. 

The IRS is hoping to hire 19,545 full-time equivalent employees in fiscal 2024. Future hiring targets will be evaluated on the basis of a three-year window. 

The plan assumes that the IRS’s normal annual appropriations remain at fiscal 2022 levels plus inflation adjustments. In that case, the agency will see a 2024 appropriation of about $22 billion. 

A more detailed breakdown of the plan follows. 

1. Taxpayer Services.

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