The Democrats' big climate and tax bill could bring an extra benefit — making your tax refund come on time
- The new spending bill from Senate Democrats will funnel nearly $80 billion to the IRS over the next decade.
- The agency has been understaffed and underfunded, and backed up with unprocessed tax returns.
For years, the IRS has been sagging under the weight of underfunding, understaffing, and literal mountains of paper. During the pandemic, that led to an unprecedented backlog of tax returns being processed — and millions of Americans left waiting for refunds.
Now, Democrats' new climate and healthcare spending package is set to funnel $80 billion into the agency over the next decade, with billions going towards upping enforcement on wealthy Americans and corporations, and improvements to taxpayer services.
"This money is a big deal," Janet Holtzblatt, a senior fellow at the Tax Policy Center, told Insider, adding: "There's a real opportunity here for the IRS and then indirectly for taxpayers to have a tax system they can count on more than the existing one."
The IRS has been contending with a shrinking budget over the last decade, 1970s level-staffing, and computers running on a 60-year-old programming language. Then came the pandemic, heaping new responsibilities like stimulus payments and child tax credit checks upon the IRS as workplaces across the country scrambled to adjust to the new normal.
"The pandemic was the proverbial straw that broke the camel's back," Nina Olson, who served as the IRS' National Taxpayer Advocate for 18 years and now helms the Center for Taxpayer Rights, told Insider. "It didn't create problems for the IRS. It exacerbated the problems that were existing and brought them to the breaking point."
The result: A backlog of millions of unprocessed tax returns, leaving some tax filers waiting on thousands of dollars in refunds for months as the IRS remains stuffed with paper. With infusions of funding, the agency could avoid that happening again.
"After decades of depleted resources, multi-year sustained funding will enable the IRS to transition from 1960s technology and 1970s-level staffing to an agency that meets 21st century taxpayers' needs," a Treasury official said in a statement to Insider. "Upgraded technology and systems will help prevent future backlogs and improve services for the American people."
From the $80 billion to the IRS in the Inflation Reduction Act, $3.2 billion is set to go to taxpayer services
"One year when I was a National Taxpayer Advocate, I identified the funding of the IRS as the most serious problem. My message to members of Congress was, if you underfund the IRS, you aren't hurting the IRS, you're hurting your constituents," Olson said. "The IRS will do what it has to do, and it will take shortcuts. It won't answer the phone, it will do more automation and not talk to taxpayers — and there will be more problems because of that."
Around $45.6 billion of the IRS funding is earmarked for tax enforcement, which will go to "areas of challenge" for the IRS, like"large corporate and global high-net-worth taxpayers," according to Rettig.
Rettig has testified that the tax gap — which measures the gap between taxes owed and paid — is over $1 trillion; Treasury Secretary Janet Yellen has said it could be a "shocking" $7 trillion over a decade.
A March 2021 study from IRS researchers and academics found that the top 1% of Americans fail to report about a quarter of their income to the IRS, but currently the majority of audits target lower-earning taxpayers. The Congressional Budget Office found that the beefed-up enforcement measure is projected to raise $204 billion over the next decade.
The IRS will also get $4.8 billion for business systems modernizations, which could be put towards taxpayer account information systems dating back to the 1960s. Those aging systems aren't able to "talk" to a lot of other systems, according to Olson, which means that the IRS could be missing "really important" information when selecting a case for an audit.
But even with that funding, there are still unknowns. For instance, the IRS's exact plans for how it means to address taxpayers' services are still unclear. The bill continues a stipulation that the agency will look into the viability of an e-file service. Olson stressed the importance of the IRS getting more creative in how it views compliance, and having proper oversight for how it spends that money.
The funding is already under fire from Republicans, who have falsely claimed that the Biden administration is implementing a plan to hire 87,000 new IRS agents and come after a variety of tax filers, which they've linked to the FBI raid of former President Donald Trump's home in Mar-a-Lago.
"These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans," Rettig wrote in a letter to the Senate.
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