By Naomi Jagoda | Bloomberg Tax
- Agency needs to recruit employees to review complex returns
- IRS expects decline in exam starts for large corporations
Expectations are high that the IRS will beef up tax enforcement with its new $80 billion in multiyear funds from the Inflation Reduction Act, but it will take some time for that to come to fruition.
The IRS has been able to spend some of the funds for taxpayer services quickly, leading to a smoother tax-filing season this year. However, it will take longer for the IRS to hire and train new enforcement personnel and boost the number of audits on wealthy households and complex businesses.
Of the roughly $80 billion in multiyear funds, $45.6 billion is for enforcement.
Robert Kovacev, a member at Miller & Chevalier, said the IRS is “digging themselves out of a hole” because it had insufficient resources in enforcement for at least a decade.
“Inevitably there’s going to be some lag between when they get the money, when they spend the money, and when we will see an effect on the ground,” he said.
Budget Proposal
The agency has yet to release its full strategic operating plan for the $80 billion, but a recent budget document provides some insights into how the Biden administration hopes to use the tax-and-climate law funds, as well as annually appropriated funds, in the near term.
The IRS is aiming to do a significant amount of enforcement hiring in the coming years, proposing using the Inflation Reduction Act funds to support 7,239 full-time equivalent enforcement employees in fiscal 2024. The IRS said in the document it is aiming to do a lot of hiring in enforcement in the short-term so new employees can be trained by experienced personnel who may be retiring soon.
But the hiring won’t instantly translate to a sustained audit boom, particularly for businesses.
“The short-term milestones will look much different than in the service area,” Nikole Flax, an IRS official leading efforts on Inflation Reduction Act implementation, said at a March conference hosted by the Federal Bar Association, before the release of the budget document. She said it will take a significant hiring effort just to prevent the agency’s workforce from shrinking.
On large corporations with assets of at least $250 million, the IRS had 1,365 examination starts in fiscal 2022, and its targets are 1,121 in fiscal 2023 and 947 in fiscal 2024. On partnerships, the IRS had 3,155 examination starts in fiscal 2022 and is targeting 8,852 in fiscal 2023 and 5,253 in fiscal 2024. These targets reflect both Inflation Reduction Act funds and discretionary funds, according to the budget document.
The IRS said that it has been able to hire and train new employees to audit partnerships, but the timing of the hiring and start date for training means that the impact of Inflation Reduction Act funding won’t been seen until at least fiscal 2025. The agency also said the target for large corporations is lower for next year than it is for this year because of the need to train new employees, the lengthy amount of time it takes to audit large corporate returns, and a focus of resources on high-income individuals—where the fiscal 2024 target is higher than fiscal 2023—and partnerships.
Abbey Garber, a partner at Holland & Knight, said the IRS has already been ramping up partnership audits, and it makes sense for the agency to focus on that area.
“The world has gone from corporations to partnerships over the last few decades,” he said.
Hiring
The IRS is looking to hire employees for enforcement positions with specialized skill sets, such as attorneys and accountants.
Flax said a selling point is that the IRS has “the most interesting work.” She also said that while historically many IRS employees spend their whole careers working at the agency, the agency also needs to recognize that it could be an appealing place for people to work for just several years.
“There are things that we could do to make those opportunities more attractive to practitioners and we’re looking to do that,” she said.
Eric Hylton, a former senior IRS official who now serves as national director of compliance at alliantgroup, said the IRS will need to take a “multipronged perspective” on hiring that includes looking at mid-level hires who can handle complex issues who may only stay for a few years before returning to the private sector.
“Having that as one of the prongs in regards to their recruitment and retention strategy, I think it’s critical,” he said.
Hylton also noted that there is currently a labor shortage in the accounting industry, which could be a challenge for the IRS. He said the IRS could look at recruiting in areas of the country with higher unemployment rates.
Kovacev said the IRS can gain a wealth of knowledge from hiring people from law and accounting firms who will ultimately return to private practice.
“Then the IRS is able to keep current on trends in the private sector from what they’re own employees are telling them from their own experience, not just what they’re seeing in audits or reading in the newspaper,” he said.
Featured Leadership
Eric Hylton
Eric Hylton held several prominent positions at the IRS, including serving as Deputy Chief of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.
