because lower inflation lawsigned into law by President Joe Biden in 2022.
The legislative plan initially included about $80 billion to expand the tax agency’s budget over the next 10 years.Congress and the White House have since agreed cut this total by about $20 billionbut $60 billion is still a lot for an institution that until recently had Approximately $14 billion is allocated annually.
I am a tax researcher who studies how The IRS uses technology And how taxpayers are coping with the agency’s growing reliance on it. While the number of IRS enforcement officers will certainly increase with the additional funding, I think the agency could get more out of it by emphasizing technological improvements.
make law enforcement more efficient
The IRS plans to use most of the new funding to strengthen To perform and improve customer service For taxpayers.
Had lots of guesswork on what increased enforcement will look like and no shortage of scaremongering about tens of thousands New Agents the IRS May Hire.
Often left out of the discussion is the agency’s staffing 22% cut between 2010 and 2021. Much of the agency’s hiring spree will fill labor shortages, not fill new positions.In addition, the IRS expects More than 50,000 employees will retire within five years.
The agency aims to employ 20,000 in the next two yearsa third of whom will work in law enforcement.
But IRS Commissioner Daniel Wayfair said better enforcement doesn’t just depend on more tax agents and auditors.he Plans to be released in early 2023 are expected to “Advances in technology and data will allow us to focus enforcement on taxpayers trying to avoid taxes, rather than taxpayers trying to pay what they owe.”
and U.S. Treasury Undersecretary Wally Adeyemo Said that “the IRS will hire more data scientists than ever before for law enforcement purposes,” with the goal of using data analysis in audits.
At least initially, the agency aims to Increase law enforcement spending by 69%from about Annual spending of $6.6 billion in 2022 and projected annual spending of $11 billion by 2031.
Technology, including electronic tax returns and a growing portfolio of online tools, has shifted work from agents to computers.Online tools include IRS Digital Scannerwhich speeds up the processing of about one-fifth of the federal tax Returns not filed electronically for 2022.
Wayfair says By increasing reliance on technology, IRS workers are becoming more efficient Services for taxpayers and Detect tax evasion.
The IRS uses data analysis in one form or another to select people and companies for audit Since the late 1960s.As early as 1986, it studied the method use artificial intelligence Improve the way audit targets are selected.
At the same time, outdated technology is hampering IRS efficiency.it Rely on a 60-year-old computer system Maintain and process data.This cripples its technical agility customer service.
3 Data sources
When the IRS collects better data, it has the ability to use Data analysis to predict breaches improve.
In addition to the data reported on the tax form itself (such as the 1099 form), the IRS evaluates three primary data sources to learn more about taxpayers.
1. Past tax returns
The IRS’ National Research Program collects data to support what it calls “Strategic Decision” to better enforce compliance.
The plan relies first and foremost on its vast store of taxpayer data, Include previous audit results, forming expectations of what a given tax return might contain, such as a tuition tax credit for taxpayers with a history of claiming the child tax credit. Submitted returns are compared against these criteria to identify potential outliers. Outliers are not necessarily tax evasion or misrepresentation of their tax obligations, but large deviations from the norm may indicate a higher likelihood of mistakes or tax evasion.
2. Public data
The IRS relies on publicly available data associated with every tax return it is being filed Conduct an audit.
This data is available to anyone who wants to look it up A substantial increase With the rise of social media and the growing role of the internet in business and advertising. A social media presence can alert the IRS to a business’s potential revenue in ways the agency couldn’t identify before the internet.
These include methods that might surprise you.
For example, as far back as 2010, IRS training materials instructed agents to use a band’s social networking site to compare musicians’ reported earnings with their likely earnings. earnings from past performances. IRS training materials instruct agents to project a musician’s gig earnings based on the number of gigs the band advertises through social media posts.
Today, people disclose all kinds of financial information, including their side hustles and their Venmo ledgers. The IRS can access and use this data like anyone else.
3. Third Party Data
The IRS can also buy data.
For example, a government contract in 2020 with the company Chainalysis was described as a “contract,” perhaps clumsily.Piloting IRS Cryptocurrency Tracking’” Such contracts provide the IRS with information related to otherwise untraceable sources of income so agents can spot underreporting.
What has changed in recent years is the amount of data it can access, has soared.
At times, widespread underreporting has led to legislation requiring third parties to report income information to the IRS, rather than requiring the agency to look it up itself.
Recent legislation includes requiring third-party payment providers such as Venmo, PayPal, and Uber to issue 1099 tax forms to them Anyone who makes more than $600 through the app in a year. These 1099s are issued to taxpayers and the IRS.
Similar legislation has recently been proposed cryptocurrency trading.
what might change
What does the increase in IRS tech spending mean for taxpayers?
when. . .when IRS details how it wants new funds to be used April 2023, emphasizing improving the taxpayer experience and increasing compliance.by using Chatbots answer taxpayer questionsan online portal that provides real-time processing, allowing taxpayers to Online Reply Notificationthe IRS could dramatically reduce the amount of time taxpayers spend corresponding with the agency or waiting while trying to speak to a staff member.
Technology-fueled law enforcement could help the agency Collect more revenue to fund government programs.
The agency also hopes to use the data to ease the tax burden for most rule-abiding Americans.
For example, when a taxpayer changes their tax status by having a child or undergoing another life change, the IRS wants to be able to proactively notify people of the consequences—whether Pay more, owe less or get new tax credits.
Most people want to pay back what they owe, no more and no less. I believe the IRS intends to make good use of its new funding to help people do just that.
Erica Newman is an assistant professor of accounting, University of Dayton.
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