The IRS, already a controversial agency, has been thrust into the spotlight as funding cuts and leadership changes create uncertainty for businesses and taxpayers. In this week’s episode of Business by the Numbers, Hunt Demerest, CPA, breaks down the implications of these changes and what they could mean for you.
IRS Budget Cuts: What Happened?
The Inflation Reduction Act of 2022 promised an unprecedented $80 billion in additional funding for the IRS over the next decade. The goal was to bolster enforcement, improve technology, and address longstanding inefficiencies in the agency. However, political pushback and budget negotiations have whittled down this allocation.
By 2025, the IRS could face significant operational challenges if further funding reductions occur. These cuts have already led to a rollback in plans to hire additional agents and expand enforcement capabilities, leaving the agency understaffed and overwhelmed.
The Resignation of the IRS Commissioner
The unexpected resignation of the IRS commissioner has sparked speculation about internal struggles within the agency. While the official reason for the resignation remains unclear, it aligns with growing challenges stemming from reduced funding and mounting political pressure.
Some experts believe that the resignation is a reflection of dissatisfaction with the current trajectory of IRS operations, particularly with its ability to adapt to modern challenges under current budget constraints.
What This Means for Audits and Taxpayer Experience
For high-income individuals and large corporations, reduced funding means fewer audits. This might seem like a win for taxpayers, but the reality is more complicated:
- Fewer Audits: The IRS has already announced plans to scale back audits, particularly for wealthy individuals and large corporations.
- Longer Processing Times: For average taxpayers, reduced funding means delays in refunds, slower resolution of notices, and an increase in administrative bottlenecks.
- Backlogs: With fewer staff to handle the workload, existing backlogs are expected to grow, further straining the system.
What About International Tax Policy?
One emerging trend worth monitoring is the potential creation of an External Revenue Service (ERS). This agency would focus on collecting revenue through international tariffs and consumption taxes rather than relying solely on domestic income taxes.
Such a shift could signal a major change in how the U.S. government approaches revenue generation. While it’s too early to predict the impact, businesses engaged in international trade should keep a close eye on these developments.
How Businesses Should Prepare
While the IRS’s reduced funding and staff shortages might seem like a temporary reprieve, businesses should not let their guard down. Here’s what you can do to stay proactive:
- Work with a CPA: Ensure your books are accurate and deductions are properly documented.
- Stay Current on Tax Policy: Changes in tax laws or enforcement priorities can affect your compliance strategy.
- Be Patient: Delays in IRS responses and refunds are likely to worsen in the near future.
Final Thoughts
The IRS is at a crossroads. While funding cuts may reduce audits and enforcement in the short term, they also bring significant challenges to the agency’s ability to function efficiently. For businesses and taxpayers alike, staying informed and proactive will be crucial as these changes unfold.
