Is $688 Billion Too Big for the IRS to Handle

Ever wonder why the IRS struggles to keep up in a fast-paced, digital-first world? The Internal Revenue Service Advisory Council (IRSAC) has an answer: inadequate funding and a lack of oversight over tax preparers. These two issues, among the 37 covered in IRSAC’s 2024 Public Report, lie at the heart of the IRS’s challenges—and potential solutions. Released with a message from IRS Commissioner Danny Werfel, the report provides comprehensive recommendations aimed at transforming tax administration. Tackling these problems isn’t just about improving compliance or closing the tax gap; it’s about restoring public trust in a system that many feel is stacked against them. The report also highlights other priorities, such as enhancing online accounts, combating identity theft, and strengthening business account capabilities. Let’s explore how IRS funding and preparer oversight are pivotal to addressing the broader challenges outlined in IRSAC’s 2024 report.

The Lifeblood of Tax Administration

The IRS is the backbone of federal programs, collecting 96% of all federal revenue. Its role funds everything from education to infrastructure, yet it operates with an increasingly constrained budget. Without adequate funding, the agency struggles to modernize, enforce tax laws, and serve taxpayers effectively. The tax gap—the difference between taxes owed and collected—has ballooned to $688 billion in 2021. Let’s break it down:

• Underreporting: The largest contributor, at $542 billion, from unreported income and inflated deductions.
• Non-filing: Taxpayers who skip filing returns altogether.
• Non-payment: Taxes reported but never paid.

High-income taxpayers, whose complex income sources rely heavily on self-reporting, are the biggest contributors to this gap. This inequity undermines trust in the system.

The Inflation Reduction Act (IRA)

The 2022 IRA allocated $80 billion over 10 years to modernize IRS operations, enhance enforcement, and improve taxpayer services. However, by 2024, $20.2 billion was rescinded, jeopardizing long-term improvements despite clear evidence that every $1 in IRS enforcement generates $5 to $9 in revenue. To address these challenges, IRSAC recommends:

• Public Education: Launch accessible tools to explain the tax gap’s impact.
• High-Impact Audits: Focus resources on high-income cases to maximize returns and improve fairness.
• Transparency: Regularly update the public on how funds are being utilized to build trust.

Fixing the Weakest Link

With over 50% of individual taxpayers relying on paid preparers, a lack of regulation leaves room for errors, fraud, and exploitation. Without mandatory standards, anyone can call themselves a tax preparer, leading to:

• Errors: Costly mistakes that result in audits or missed refunds.
• Fraud: Inflated deductions or credits for higher refunds.
• Exploitation: Low-income taxpayers falling victim to unscrupulous practices.

After the 2013 Loving v. IRS case struck down the Registered Tax Return Preparer (RTRP) program, the IRS introduced the voluntary Annual Filing Season Program (AFSP). However, with only 15.5% of uncredentialed preparers participating, its effectiveness is limited. IRSAC recommends the following to strengthen oversight:

• Filing Season Agent (FSA) Credential: Introduce a new designation requiring partial completion of the Enrolled Agent exam and ongoing education.
• Phase Out AFSP: Redirect efforts toward the more robust FSA program.
• Promote Enrolled Agents: Highlight these highly trained professionals to help taxpayers make informed choices.

Strengthening IRS Operations

The IRS is working to make taxes less of a burden by embracing modernization and improving taxpayer experiences. Imagine digital dashboards where taxpayers can effortlessly track their obligations, authorize third parties securely, and navigate simplified forms that don’t require a translator. Tools like AI-powered assistants and live chat aim to make tax compliance less stressful and more efficient. This vision is part of the IRS’s Strategic Operating Plan, which outlines 42 initiatives designed to bring the agency into the future. Priorities include:

• Go Digital: Expand e-filing and build robust online accounts for seamless interactions.
• Smarter Audits: Use AI to pinpoint issues and target noncompliance effectively.
• Enhanced Training: Prepare staff with the skills needed to handle complex and evolving challenges.

At the same time, the IRS must tackle two major hurdles: identity theft and workforce shortages. IRSAC suggests key measures to address these issues:

• Quicker Help: Streamline victim support for identity theft cases.
• Tougher Security: Bolster protections to prevent scams and secure taxpayer data.
• Smarter Hiring: Attract top talent with competitive pay and a focus on diversity.

By combining cutting-edge technology with strengthened security and a more robust workforce, the IRS is building a future-ready agency while tackling fraud head-on. These efforts promise to deliver a tax system that’s not just efficient but also trusted by the people it serves.

Call to Action

A well-funded, regulated IRS benefits everyone by ensuring fairness, efficiency, and trust in the tax system. Adequate resources and proper oversight are crucial for creating a system that works for all. The challenges are clear, and the solutions are within reach. The question now is whether Congress, the IRS, and other stakeholders will rise to the occasion and act decisively. Subscribe to our newsletter for more insights and stay ahead of the curve as we explore how to shape a tax system that serves everyone effectively.