Tax Planning More Important Than Ever as IRS Plans to Increase Enforcement

The IRS is set to step up enforcement efforts as it plans to receive nearly $79B in new funding from the $3.5T budget bill. The funds are meant to strengthen tax enforcement initiatives with more audits and new technology. What does this mean for tax planning? That it is more important than ever before.

Should You Be Concerned About More Funds Being Given to the IRS?

Senator Mike Crapo, a Republican from Idaho, noted, “In light of recent proposals to massively expand the IRS with unprecedented amounts of mandatory funding and the IRS’s continued abuses of taxpayer rights and privacy, any additional IRS funding and monitoring of Americans’ private finances must come with guardrails to help protect against abuses.” 

This concern is a big reason why an additional $410M is set aside in the bill for oversight of the tax agency. This oversight would help protect taxpayer privacy and make sure no undue burden is imposed on small businesses. 

Still, some people feel uneasy about the IRS gaining power and strength. For opponents of the measure, President Biden argues that it will help to close the “tax gap” and raise funds for new spending plans.

Will Additional Funds Close the Tax Gap?

So, what is the tax gap? It’s the difference between taxes paid and taxes owed to the federal government. The latest estimates by the IRS place the tax gap at $441B in lost revenue each year. It’s estimated that the voluntary compliance rate is 83.6%, which means there’s potential to close the tax gap by over 15%.   

If the IRS were able to close this tax gap by improving tax compliance, it could potentially raise up to $1T in revenue over the next 10 years, according to some estimates. Having a more robust budget for examining returns and enforcing the tax code should result in identifying unreported or misreported income, thus raising federal revenue. 

Since 2011, the IRS enforcement budget has decreased 25%, and during this time there has been a 45% decline in the number of returns that have been examined. Restoring audit rates back to 2011 levels should raise more than $700B over the next 10 years, according to some estimates that take into account a focus on high-income taxpayers and corporate tax filers.

3 Areas Where the IRS Expansion Will Focus

As the IRS seeks to close the tax gap, it will focus on achieving three main goals:

1. Increase the proportion of tax returns that are examined. This will be carried out using increased enforcement resources.
2. Improve information reporting requirements for sources of income that may be unclear. Having better reporting requirements would give greater transparency to the IRS and to taxpayers who may not understand their tax liabilities.  
3. Modernize information technology infrastructure to better identify errors in tax returns. Any technological improvements the IRS can make to identify more errors should generate greater revenue over time.  

The Impact of IRS Expansion

In order to improve tax compliance and strengthen enforcement of the tax code, the IRS needs to expand. The question is, how big of an impact will the proposed funding make? 

The nonpartisan Congressional Budget Office estimates an expanded IRS would yield an extra $200B in revenue over the next decade, which would lead to a net income of $120B, taking into account the expansion’s cost. Meanwhile, the Treasury Office of Tax Analysis estimated an IRS expansion, together with stricter tax regulations and penalties for tax evasion, could raise $700B in additional revenue. 

Either way, an increased budget will lead to more enforcement and tax collection. This will make tax planning for individuals and business owners more important moving forward.

A Bigger IRS Makes Tax Planning More Important

With the notion of greater tax enforcement, more audits and increasing tax rates coming soon, many people would benefit from tax planning now. The main problem for many when it comes to tax planning is the complexity of it all. It requires taxpayers to navigate tax rules and forms, find strategies and make calculations — it can be quite intimidating.

Questions such as “Am I taking the right deduction here?” or “Does this tax credit really apply to me?” often go unanswered, unless you’re working with a professional tax planner. Moreover, there are hundreds of possible strategies, and who has time to research all of them? 

Americans spend over 8.1 billion hours on tax compliance, but just a small fraction of that time is spent on tax planning. With the IRS expanding and increased tax complexity likely on the way, tools such as Corvee, a tax planning software, are becoming increasingly valuable.   

When the average taxpayer attempts tax planning without adequate tools, they quickly find it near impossible to learn about every tax strategy available. This is because the US tax rules are extremely complex, thousands upon thousands of pages long and constantly being adjusted. For the average person, there are simply too many variables and too many strategies to do a comprehensive tax plan on their own. 

This is why Corvee was created — to find the tax strategies for you. You feed it inputs, just like you would give details to an accountant for a tax return. Then, the software can find the strategies that pertain to your particular situation and calculate your potential savings, including a detailed report of every strategy that you can apply. 

As the IRS expands with increased efforts to bolster tax enforcement and as tax rates rise, tax planning is becoming vital for anyone looking to save money on their taxes in the upcoming decade.