Inside the $80 Billion Plan to Enhance IRS Enforcement

At a glance

• The main takeaway: President Joe Biden and his administration have proposed an $80 billion budget increase for the IRS with the goal of closing the tax gap and cracking down on potential cases of tax evasion.
• Impact on your business: If the proposals are passed, businesses should expect increased scrutiny and more in-depth examinations by the IRS, which could lead to additional reporting requirements among other outcomes.
• Next steps: Aprio’s Tax team can help you identify areas in which you may be affected and lay the foundation to better manage future IRS audits and examinations.

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The full story:

While most of DC and the policymaking world focuses on the infrastructure bill, there is a different piece of regulatory news waiting in the wings: tax enforcement legislation totaling $80 billion.

As part of the proposals made in the American Families Plan, President Joe Biden and his administration are hoping to pass tax compliance initiatives that will boost the IRS’s budget and close the tax gap, which is the difference between the taxes owed to the U.S. government and the taxes that are actually paid. That gap was nearly $600 billion in 2019 and is expected to ramp up to $7 trillion over the next decade, according to the U.S. Department of the Treasury.[1]

Aside from filling the tax gap, the proposals also plan to address the IRS’s struggle to stay afloat under the weight of mounting, complex tax returns amid staffing shortages. In fact, in the 10 years between 2010 and 2020, the IRS lost more than 33,000 employees.[2] The $80 billion proposal seeks to remediate those issues by devoting more funds to hiring new agents and introducing other tools to streamline the review process.

At Aprio, our Tax team has been and will continue to monitor the progress of these proposals and keep clients abreast of the key potential changes they need to know. But in the meantime, here is a primer on the enforcement actions — from what we know now to what we may expect in the coming months.

What is the potential impact of these enforcement actions? 

By increasing the IRS’s budget, these tax proposals will give the institution new tools and more resources — particularly when it comes to staffing — to crack down on what they see as “tax dodges” by high-net-worth taxpayers and large corporations. New tools are expected to come in the form of more advanced technology and data analytics methods; from a staffing standpoint, the funding will be devoted to training new auditors to enhance tax enforcement through more examinations.

Specifically, according to the Treasury, the administration seeks to raise audit rates for those individuals earning more than $400,000 per year.[1] From the position of the IRS, individual and corporate taxpayers with higher incomes may be more likely to withhold said income in obscure, nontransparent structures that are harder to discern from a tax perspective. Thus, a key part of the proposals includes enhanced capabilities for the IRS to substantiate income from “nonwage sources.”

As a result, IRS audits going forward may be more broad-based and tedious for the taxpayer — and they will certainly come with more scrutiny. In our most recent article on the infrastructure bill, we explained that cryptocurrency is one area that will be put underneath the microscope, particularly from a reporting standpoint.

But there are other potential outcomes that could be spurred by increased IRS enforcement, which business owners and taxpayers need to keep in mind:

• Increased scrutiny of S corporations and partnerships: The IRS will look closely at these structures in an effort to crackdown on perceived “loopholes,” such as using transfers to hide, defer or recharacterize income to avoid taxation. We expect to see a lot of examinations in which there will be more aggression with regard to determining whether S corporations are paying proper wages and being taxed on them accordingly.
• Extended statute of limitations: Most tax examinations have to be closed and assessed within three years from filing, with the exception of fraud or a provision that extends the statute, among other special circumstances. With the increased oversight that will come with these proposals, we may see the IRS asking taxpayers to extend the statute of limitations to allow for more in-depth examinations, which may affect tax payment timelines and potentially even amounts due.

Of course, there’s no crystal ball to predict exactly what outcomes will arise from these proposed tax initiatives, and the list above is far from exhaustive. In the coming months, it will be essential for businesses and high-net-worth individuals to regroup with their tax advisors to assess their own unique situations ahead of any potential legislative measures.

The bottom line

The $80 billion in funding for the IRS may not be appropriated by Congress in full. But even if certain provisions are struck down, we can expect that some of them may be resurrected in the future, in their existing form or another.

As I mentioned above, the best way to prepare yourself and your business for increases in tax enforcement is to identify areas in which you may be most affected. That’s where Aprio can help. Our Tax team is up to speed and well-versed on the aspects of these proposals that are most relevant to our clients. We can help you prepare for future and more in-depth IRS examinations to achieve the best possible results and minimize headaches.

[1] Ibid, 1.

[1] U.S. Department of the Treasury, “The American Families Plan Tax Compliance Agenda,” May 2021, https://home.treasury.gov/system/files/136/The-American-Families-Plan-Tax-Compliance-Agenda.pdf, accessed August 2021.

[2] Internal Revenue Service, “Internal Revenue Service Progress Update: Fiscal Year 2020,” 2020, https://www.irs.gov/pub/irs-pdf/p5382.pdf?mod=article_inline, accessed August 2021.