Worries over a beefed-up Internal Revenue Service are unfounded for most American taxpayers, according to one tax expert, who said the agency would likely zero in on wealthy folks and crypto investors with its newly allocated funds along with much-needed tech upgrades.
Nearly $80 billion in the Inflation Reduction Act signed last week by President Joe Biden will go to various aspects of the IRS, a federal department that had experienced numerous budget cuts and understaffing issues for the past decade.
More than half of the funding will ramp up the agency’s enforcement efforts designed to close the tax gap, such as recruiting more enforcement agents, providing legal support, and building “investigative technology," moves that will expand its capability to audit more wealthy individuals and companies rather than targeting everyday Americans as some lawmakers have suggested.
“Nothing’s changed," Larry Pon, a certified public accountant based in California who once worked at the IRS, told Yahoo Finance. "Accurately report all your income and claim the deductions that are available to you and claim the credits that are available to you, as long as you are entitled to them.”
IRS to target wealthy individuals and crypto accounts
IRS Commissioner Charles Rettig, who was appointed by former President Donald Trump, along with the Democratic party have repeatedly expressed that the new enforcement funds would not be directed at small businesses and families making under $400,000.
"Wage-earning taxpayers like firefighters, construction workers, teachers and police officers are among the most compliant taxpayers, given that their incomes come from Forms W-2 and 1099," Rettig wrote this week in an exclusive op-ed on Yahoo Finance. "These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans."
Instead, the IRS would focus its audit efforts on high-income taxpayers, Rettig wrote.
“You want to be efficient and go where the money is,” Pon told Yahoo Finance.
And the bureau’s recent audit trends followed this pattern. In 2019, taxpayers making over $500,000 were 9.5% more likely to get audited than taxpayers making less.
“My personal observation is a lot of clients who are being audited were once making over a million dollars,” Pon said, noting he has nearly 30 years of tax service experience. “The IRS figured if we could find anything, we could find it from them.”
There is also a practical reason for the IRS to focus on wealthier Americans with specific income types: efficiency. It is more efficient for the agency to recruit and train employees to perform specialized audits as they will quickly and accurately know what to look for.
The IRS has been expanding its expertise in the asset class for virtual currency even though its crypto guidelines are still sparse. However, experts believe the new funding will heavily focus on this growing realm, too.
The agency’s focused intention should not come as a surprise to anyone. The IRS started asking taxpayers in 2020 about their virtual currency activity on the first page of Form 1040, the U.S. Individual tax return. This question comes right after name, address, and Social Security number; and before eligible dependents or income.
Cryptocurrency "is going to be a hot item,” Pon said.
IRS still uses 60-year-old technology
However, there is a considerable discrepancy between what the IRS wants and what it can have. The system that the IRS still uses today is nowhere near blockchain technology.
“I worked for the IRS in 1984 and I am sure they are still using the same antiquated computer system,” Pon said, “It was old even then."
In fact, the systems the agency uses to hold the records of individual and business taxpayer accounts "are the oldest major technology systems in the federal government," according to the 2021 report to Congress from the National Taxpayer Advocate (NTA).
Today, the IRS still uses the same technology from 60 years ago — a system called Individual Master File (IMF) that was mostly written in COBOL, a programming language created by IBM in the 1960s. The agency's approximately 60 case management systems generally are not interconnected, according to the NTA report, so employees must transcribe or input information from one system and mail or fax it to others.
Janet Yellen, U.S. Secretary of Treasury, has asked the IRS to create a modernization plan in six months, while Erin Collins, the National Taxpayer Advocate (NTA), has repeatedly pushed for technology upgrades. About $4.75 billion from the IRA is earmarked for tech modernization.
"Obsolete IT systems limit the functionality of online taxpayer accounts, prevent taxpayers from obtaining full details about the status of their cases, and prevent the IRS from selecting the best cases for compliance actions," according to the NTA report. "Although the IRS is making strides with its case management system, it still has a long way to go."
Rebecca is a reporter for Yahoo Finance.