Inside the IRS - 2023 Updates

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters.


BROOKS NELSON: Welcome to this edition of the Cherry Bekaert Tax Beat podcast. Today we're talking about recent activity with our favorite friends, the IRS, how they plan to spend the $80 billion recently authorized under the Inflation Reduction Act, the latest Dirty Dozen list, and a few other issues impacting taxpayers along the same line of discussion.

BROOKS NELSON: Joining the conversation today, once again, is Anne Oliver, director and leader of our firm's Federal Tax Controversy Practice. Ms. Oliver, how are you doing today?


ANNE OLIVER: I am doing great. We have hit farmer's market and sailboat regatta season here in Norfolk. We have some beautiful fresh produce coming on the weekends and our sailboat races in the evening, so I could not be happier with the beautiful weather and the change away from winter.


BROOKS NELSON: And low humidity right now, too.


ANNE OLIVER: Yes. This is the ideal time right before the humidity kicks in. You get to enjoy the warm weather and sunshine without the crushing humid air.


BROOKS NELSON: Yes. And as always, joining me is Sarah McGregor from the Greenville office. Ms. McGregor, how's life treating you?


SARAH MCGREGOR: Life here is good as long as you don't breathe the pollen in the air. We may not have snow, but we have yellow pollen that lasts for weeks.


BROOKS NELSON: Is it snowing pollen in Greenville right now?


SARAH MCGREGOR: It is definitely. Definitely.


BROOKS NELSON: All right. I'm Brooks Nelson, partner in the Richmond office.

BROOKS NELSON: Today we're going to try things a little differently. We're going to give you two quotes.

BROOKS NELSON: Quote number one: "The president has asked for increased funding for the IRS in order to ramp up its automatic data processing program. Automatic data processing will permit us to remedy serious deficiencies in our existing system that could be overcome by manual methods only with very heavy increases in payroll, facilities, and other costs. Electronic data processing, in other words, will allow for new efficiencies in the IRS. Such an investment would pay dividends in the long term, and the additional costs would be recovered many times through increased tax collection in later years."

BROOKS NELSON: Quote number two: "The present audit coverage is not adequate to secure the full revenue that should be reported and collected. Errors of significant amounts of money often are undetected. This inadequate coverage will cause some people to deliberately understate their income or overstate deductions."

BROOKS NELSON: Anne, what should we learn from those quotes? Please educate us.


ANNE OLIVER: Those are all the big concerns facing the IRS right now that we've all heard about: the push for modernization of its systems and technology, the ability to collect taxes that are actually due, and the way in which the IRS can effectively audit taxpayers.

ANNE OLIVER: What's interesting is that those quotes were not from today. They were actually from 1961, when Eisenhower and Kennedy were seeking additional funding for the IRS.

ANNE OLIVER: So the problems that we see plaguing the IRS today and for the last several years have really been around for decades.

ANNE OLIVER: The reality is the IRS, for a very long time, has not had enough money to update its technology. They're actually using some of the same systems that existed back in 1961 after they were able to get some funding.

ANNE OLIVER: They just don't have enough money to help taxpayers voluntarily comply with their tax obligations, which we'll talk about. Everyone, I'm sure, has some sort of story or has heard a story about trying to deal with the IRS and get information or talk to someone on the phone.

ANNE OLIVER: The IRS also doesn't really have enough money to go after those taxpayers who don't voluntarily comply. So it's been the same vicious cycle year after year, decade after decade.


SARAH MCGREGOR: But Anne, aren't we fixing this? The IRS has just been authorized to spend $80 billion over the next 10 years. How are they going to use these funds?


ANNE OLIVER: Yes. The Inflation Reduction Act, as Brooks mentioned, authorized $80 billion to go to the IRS over 10 years, which is phenomenal. That's on top of their current budget.

ANNE OLIVER: The normal funding that the IRS would get has been relatively steady, between about $12 billion and $14 billion every year. This money from the IRA is on top of that.

ANNE OLIVER: That's going to be more than a 50% increase in funding every year for the next 10 years, which is huge. If it's used correctly, this could be the impetus for some really big changes at the IRS.

ANNE OLIVER: The Inflation Reduction Act specifically allocated that $80 billion to four different areas and dictated how much money the IRS is supposed to spend on each area.

ANNE OLIVER: The largest piece was given to enforcement. That gets $45.6 billion of the $80 billion over 10 years, so more than half the total amount.

ANNE OLIVER: The next biggest chunk went to operations support, which includes things like IT systems, and that received $25.3 billion of the total amount.

ANNE OLIVER: $4.8 billion was dedicated to business systems modernization, and $3.2 billion was allocated to taxpayer services, which some might say is potentially backwards.


BROOKS NELSON: Let's back up on that big number you just said. Over half of the funds are directed toward enforcement. That has created more than a little bit of paranoia in the public, and many sources in the press have talked about that.

BROOKS NELSON: Does this now mean the IRS is going to be looking at every credit card charge you make and every bank withdrawal, et cetera? What does that really mean, Anne?


ANNE OLIVER: As you said, that was a huge concern when the IRA came out: that the focus was really going to be on going after taxpayers as opposed to helping them.

ANNE OLIVER: There's been a lot of response to that. The AICPA suggested that the IRS consider paying out of that enforcement funding certain things that could potentially fall under the enforcement umbrella, like recruiting and retaining workers for the enforcement function and developing service and technology infrastructure to support enforcement.

ANNE OLIVER: Those would technically otherwise fall under some of the other categories. They also suggested that the IRS more fully explore options to use that enforcement funding for business systems modernization overall. The argument is that everything is relatively connected.

ANNE OLIVER: But to think that we're going to spend $45.6 billion simply hiring revenue agents, for example, would be a really bad idea.

ANNE OLIVER: Erin Collins, the National Taxpayer Advocate, pointed out that the normal IRS budget funds enforcement and taxpayer services at a ratio of two to one. So still more money goes toward enforcement than taxpayer services, but not outlandishly so.

ANNE OLIVER: Under the IRA, enforcement and taxpayer services are funded at a ratio of more than 14 to one. That's an extreme jump in putting so much more money into enforcement.

ANNE OLIVER: The National Taxpayer Advocate suggested that some of that enforcement funding be redistributed to the business systems modernization and taxpayer service accounts. She also said the top priority right now needs to be improving taxpayer service, especially after the struggles everyone has gone through over the last couple of years.

ANNE OLIVER: It's almost at a low point post-COVID, and everyone's focus needs to be on that right now. Enforcement can come down the road.


SARAH MCGREGOR: When you're talking about the service side, that's very important to us as tax advisors. Did they say anything about what that would look like? What kind of taxpayer services would be included in that funding?


ANNE OLIVER: Yes. The way they looked at it was interesting: looking at it from the final goal of getting more taxpayers to correctly report and pay their taxes.

ANNE OLIVER: The thinking is that you can go about that one of two ways. You can use enforcement, the stick, by going after taxpayers and forcing them to pay the correct amount. Or you can increase taxpayer services to assist taxpayers in reporting and paying the right amount and helping them comply.

ANNE OLIVER: The AICPA and the National Taxpayer Advocate have talked about giving additional system support to taxpayers, letting them ask questions, call the IRS and reach someone on the phone, go to a taxpayer assistance center in person and actually speak to someone, access accounts online and get real-time data that helps them file their return, and respond to IRS notices electronically.

ANNE OLIVER: That allows for more of a real-time conversation instead of playing snail mail back and forth with correspondence.

ANNE OLIVER: By building up those taxpayer services, we can encourage and support taxpayers to do the right thing on the front end. That's actually going to be a lot cheaper and far more effective than for the IRS to try to audit its way out one taxpayer at a time on the back end.

ANNE OLIVER: This is also something the IRS supports. Douglas O'Donnell, who was the acting commissioner before Danny Werfel was sworn in, and who is also the deputy commissioner of services and enforcement, said just a few weeks ago that the IRS can get to enforcement at some point, and they certainly need to do that.

ANNE OLIVER: But to the extent that they can help taxpayers better comply, they know taxpayers will comply. Putting the resources toward that is actually going to be the best answer for both taxpayers and the IRS.


SARAH MCGREGOR: Let's have a litmus test here. Secretary Yellen said they were going to answer the phone a lot more this year when taxpayers and tax advisors called to improve the service side.

SARAH MCGREGOR: I think she went from their current frivolous level all the way up to almost what should be a normal level, more than 80%. I'd be happy with it being more likely than not that they would answer when you call.

SARAH MCGREGOR: From your perspective, Anne, you're on the phone with the IRS all the time. How's this working out?


ANNE OLIVER: She did. 85% was the goal, which was more than five times what had been happening. That's really crazy when you think about it.

ANNE OLIVER: In 2021, the level of answering the phone was 11%. So maybe one in 10 people who called could get through, and that was surely after hours and hours of waiting. In 2022, it was only 13%.

ANNE OLIVER: To get to 85% was a lofty goal. According to some metrics, they have actually reached that. As with any statistic, when you start playing with the different variables, you can drastically change the numbers.

ANNE OLIVER: TIGTA came back and said it was more like 52% that the IRS was currently operating at. The 85% level of service was because they were only looking at 30 of the 110 phone lines. If you pick which phone lines you want to use for your statistic, you can skew it.

ANNE OLIVER: But regardless of whether it's 52% or 85%, it has definitely gotten better.

ANNE OLIVER: The IRS has hired about 5,000 people to work the phone lines in the last couple of months, which is pretty phenomenal. There has definitely been a marked decrease in wait times for calls.

ANNE OLIVER: This is across all lines. The IRS has separate lines for businesses, individuals, collections, international, and certain kinds of excise or employment tax returns. I call all of those lines relatively regularly, and they have all been better since the start of 2023 than they ever were before.

ANNE OLIVER: The only downside I've seen with so many new hires is that you can tell some of the representatives are not as familiar with the accounts they're looking at and the information they're being requested to find.

ANNE OLIVER: I have been put on hold a little longer while they either look something up in the Internal Revenue Manual or confer with their manager. But I would still rather hold once the person has answered the phone than hold listening to the regular hold music wondering if someone will ever answer.


BROOKS NELSON: Let's move on to the topic of technology, which is at the backbone of all these issues, I believe. It's got to be a key part of the solution.

BROOKS NELSON: We know this is a reputable podcast. We would never want to trade on rumors. But it has been suggested that there may be some computers from the Eisenhower timeframe still being used by IRS employees.

BROOKS NELSON: What is going to be the plan for technology and all of this, Anne?


ANNE OLIVER: The IRS has been pushing for better technology, like we said, for decades. One of the biggest problems they're currently facing is that they still don't machine read most paper-filed tax returns.

ANNE OLIVER: For the millions and millions of returns that are paper filed every year, there is an IRS employee manually retyping every single number from those forms, digit by digit, into the IRS system. Obviously, that's wildly inefficient.

ANNE OLIVER: In just the last two years, they had about 30 million individual returns that were paper filed. That's not counting business, excise, estate, international, et cetera. So we're talking millions and millions of pieces of paper.

ANNE OLIVER: That's one of the reasons there was such a big backlog in processing returns and especially issuing refunds, which again is probably something people have experienced or heard of because it was taking so long.

ANNE OLIVER: Just last month, the IRS announced plans over the next couple of years to implement scanning technology. That will allow paper-filed returns to be machine-read and then very quickly input into the system electronically.

ANNE OLIVER: It would still take longer than an electronically filed return, which is obviously an almost instantaneous processing of the information. But being able to scan it and have that information input electronically rather than manually will go really fast.

ANNE OLIVER: On the enforcement side, they're also looking to use technology. They want to invest in data and analytics to help with auditing taxpayers.

ANNE OLIVER: By using the data they get from exams to figure out which are the most pressing issues that should be audited, they can figure out which large corporations, high earners, and complex partnerships should be examined.

ANNE OLIVER: That lets them use their enforcement resources more efficiently to go after taxpayers where they think there's actually going to be a likelihood of some sort of adjustment on exam.


SARAH MCGREGOR: As we look at what the IRS had planned, they were a little late getting this strategic plan back to Congress, who asked how they were going to spend this $80 billion appropriation.

SARAH MCGREGOR: Some of that may have been because they were waiting for the new commissioner to be approved and installed. But he's on board with this plan as well?


ANNE OLIVER: Yes. The Strategic Operating Plan came out on April 6, and you're right, they were waiting for Werfel to be sworn in so he could sign off on it and introduce it.

ANNE OLIVER: It's basically a roadmap for how they plan to use that $80 billion. It's 150 pages long if anyone is currently suffering from insomnia, but it does have a pretty helpful preamble that lays out what it's looking to do.

ANNE OLIVER: It's organized around five main objectives. From there, they've come up with 42 initiatives designed to achieve those objectives, not necessarily today.

ANNE OLIVER: Remember, this $80 billion is intended to be spent over the next decade. Some initiatives are things they intend to implement now. Others are things down the road.

ANNE OLIVER: There are almost 200 key projects they've identified and 200 milestones to keep the IRS on track over the next decade.

ANNE OLIVER: When you look at the objectives in the Strategic Operating Plan, there are five. The middle one focuses on expanding enforcement on taxpayers that have complex tax filings and high-dollar noncompliance. So that enforcement piece is in there.

ANNE OLIVER: But the other four objectives have nothing to do with compliance. They talk about dramatically improving services to help taxpayers meet their obligations, not to help the IRS collect from them, but to help taxpayers and help taxpayers receive the tax incentives they're eligible for.

ANNE OLIVER: It also talks about helping taxpayers quickly resolve issues when they arise. Again, very taxpayer-focused and taxpayer-favorable.

ANNE OLIVER: One of the objectives is to deliver cutting-edge technology, which we've talked about doing in a couple different ways.

ANNE OLIVER: The last one talks about attracting, retaining, and empowering a highly skilled, diverse workforce. That's really key because the IRS has one of the worst retention statistics of any federal government agency, and they have had a lot of turnover.

ANNE OLIVER: About 63% of the current IRS workforce is eligible to retire in the next five years. Being able to find new people and keep them is going to be a huge goal of the IRS, and hopefully they can use some of this $80 billion to achieve that.


BROOKS NELSON: Come work for the IRS. Everybody loves us.


ANNE OLIVER: That's going to be their slogan. It's going to be like the "I Heart New York" stickers that are going over very well. Maybe they can hire the same PR firm.


BROOKS NELSON: All right. Let's go to some other IRS news. Sarah, the IRS released its annual Dirty Dozen list. Why don't you talk about what the Dirty Dozen list is and what we learned from this year's edition?


SARAH MCGREGOR: The IRS annually lists 12 different issues that they see impacting and hurting taxpayers or creating problems or perpetuating illegal activities when it comes to tax filings.

SARAH MCGREGOR: These can include scams that take money from taxpayers or trick them into giving up money or information.

SARAH MCGREGOR: This year's number one item is the Employee Retention Credit. The good news is that some of the things that had been on the top of the list got pushed down to the bottom, and a few things that were off the list during the COVID years have been pulled back onto the list.

SARAH MCGREGOR: We've published articles about the Employee Retention Credit, and the team in our firm that works on it has seen these situations. It's all about very aggressive claims or misinformed claims being filed by companies unknowingly because of claims or information they've been told is correct, even when they may not be eligible.

SARAH MCGREGOR: Unfortunately, those pushing these ideas and opportunities take nice fees, but then they leave the employer holding the bag when the IRS comes through and says, "No, you're not eligible."

SARAH MCGREGOR: That's their number one item this year.

SARAH MCGREGOR: Following that, they listed a number of items involving scamming, phishing, smishing, attempts to steal taxpayers' information, attempts to get into their accounts, fake charities, particularly when we've had so many disaster areas and natural disasters, and spear phishing and cybersecurity affecting tax professionals.

SARAH MCGREGOR: They try to get to our data and files. As we help taxpayers, we have a lot of taxpayer information that's super valuable to those trying to take it.

SARAH MCGREGOR: They also listed schemes aimed at high-net-worth individuals and other taxpayers, involving plans and ideas that the IRS doesn't like or doesn't believe work and continues to challenge.

SARAH MCGREGOR: So there are some new things on the list, some old things, and it's always nice to see that number one is somebody else's problem. That's a good one.


BROOKS NELSON: Clearly ERC is still a very hot topic, but definitely with some very bad players in that industry. Anytime there's a really good thing in the tax law, there are normally going to be some bad actors out there trying to take advantage of it.

BROOKS NELSON: Let's go into some slightly better news and talk about Notice 2023-21 and the Bittner case. What do you know, Anne?


ANNE OLIVER: The IRS just came out with Notice 2023-21, and it was very welcome relief on a topic that we've been worried about for a few years.

ANNE OLIVER: If people can remember back to April of 2020, if you have not blocked all that period of time out of your mind, the IRS postponed deadlines. The April 15, 2020 deadline for 2019 returns was postponed until July 15, 2020, which was great news at the time.

ANNE OLIVER: You had additional time to file your return and additional time to pay any taxes that were owed.

ANNE OLIVER: The next year, we got another postponement from April 15, 2021 to May 17, 2021, so just a month that time for the 2020 returns. Again, welcome news at the time.

ANNE OLIVER: The problem is when we get three years down the road, which is where we're at today, when clients are looking to file refund claims. You have to file them within three years of the original return being filed.

ANNE OLIVER: That was not a difficult question to answer. If your return was filed July 15, 2020, three years later would be July 15, 2023.

ANNE OLIVER: The problem is the second piece of refund claims: how much you are entitled to. When you make estimated payments during the tax year or when your employer withholds payments that you then get on a W-2, those are all deemed paid on April 15 of the following year. Those were not moved. That was not postponed.

ANNE OLIVER: So if you filed a claim July 15, 2023, you would only be able to get payments refunded that were made between July 15, 2020 and July 15, 2023. That means all of your estimated tax payments, withholding, and everything else would be unable to be refunded, which is obviously a difficult situation.

ANNE OLIVER: The IRS finally addressed that this was going to cause a lot of headaches. They said that because this postponement was not an extension and therefore did not add time to the three-year look-back period for refunds, they would discount the time of that postponement, effectively letting people go back to April 15.

ANNE OLIVER: So we can rest assured now that refund claims for 2019 and, next year, for 2020 returns that are filed within three years of when the return was filed will be okay, and taxpayers will be able to get the amount of the refund they are entitled to.


BROOKS NELSON: Which was the right answer.


ANNE OLIVER: It was definitely the right answer. It was actually supported by an internal IRS document that provided guidance from years ago.

ANNE OLIVER: That postponement was unrelated to COVID and was related to disaster relief from some tornadoes in a few states in the U.S. that received postponements. This is the conclusion they came to, which is that this is the right way to handle it.

ANNE OLIVER: Unfortunately, the way the statute and regulations are written, this isn't the automatic answer, which is very odd. You would think we could fix the problem by saying anytime there's a postponement, you add that postponed period to the refund period. But that would be a statutory fix, which would be up to Congress.


SARAH MCGREGOR: In all their spare time.

SARAH MCGREGOR: We've got tons of different postponements for all kinds of natural disasters. Is each one of these going to require the IRS to make this same announcement? Or is there blanket proof? Or do we just have to be super careful looking at filing amended returns?


ANNE OLIVER: What's really interesting is that if you look back historically at most of the postponements that have occurred, take Florida hurricanes as the big example, because that happens almost every year, those Florida hurricanes happen around the September-October filing deadline.

ANNE OLIVER: That's an extended deadline for taxpayers anyway. Long story short, you don't end up with the same problem that you do when they postpone the original filing due date as opposed to the extended filing due date.

ANNE OLIVER: Normally, the fix sort of just exists because taxpayers already had to extend to get to that deadline. But with this one, by postponing the original deadline, if you didn't then extend to October 15, that's when you ran into this problem.

ANNE OLIVER: So it was, along with everything else in COVID, just a parade of horribles where all of this came together to create this bad situation.

ANNE OLIVER: It just isn't as common because we more often see postponements not at that March 15 or April 15 original due date. That's the only reason why it doesn't come up every year, because some county or at least some state across the country will deal with a postponement of some sort every single year.


SARAH MCGREGOR: On the other front, in the Bittner case, this was Bittner v. United States. It was a Supreme Court decision that resolved an issue that had been floating around for a great number of years.

SARAH MCGREGOR: For individuals or businesses, those persons that have either signatory authority over or own a foreign bank or financial account, Treasury has authorization to require those individuals in the U.S. to report those accounts every year to Treasury.

SARAH MCGREGOR: It's on Form 114, commonly referred to as an FBAR, a Foreign Bank Account Report.

SARAH MCGREGOR: The problem is the penalties are pretty steep. If you are not willful, meaning this is just an unintentional mistake, and you failed to report a particular account on that form or failed to timely report that form, the penalties had been assessed based on $10,000 for each account that was listed on the form.

SARAH MCGREGOR: Taxpayers and reporters have been saying all along, "No, the penalty should be assessed based on the report itself, not based on the number of accounts I have on the form."

SARAH MCGREGOR: Finally, Mr. Bittner got his case heard by the Supreme Court. In his situation, there were roughly 50-plus foreign bank accounts that needed to be reported on his Form 114, the FBAR report. Over the period from 2007 through 2011, those did not get filed.

SARAH MCGREGOR: So all in, he missed five years' worth of form filing. That would have been $10,000 per form and a $50,000 penalty. But he was assessed by Treasury $2,720,000, $10,000 for each of the 50-plus accounts that needed to be reported for each of those five years.

SARAH MCGREGOR: That's a pretty dramatic difference.

SARAH MCGREGOR: The good news is the Supreme Court ruled that the penalty is assessed per form and not per account. So that leaves an opportunity for many people reporting foreign bank accounts who have been assessed these penalties on a per-account basis to go back and request relief and get those penalties reduced to a per-form basis.

SARAH MCGREGOR: That's very good news to have resolved for taxpayers in this situation.

SARAH MCGREGOR: Again, this is only for unintentional mistakes, not for those who willfully withheld reporting. The penalties there are far worse and can be up to 50% of the account balance at the highest point during the year.

SARAH MCGREGOR: I am quite certain Treasury will lean far more into willful failure to report where they can assess substantial fines now, as opposed to non-willful failure.

SARAH MCGREGOR: It is very important that individuals take this seriously and consider their position and report timely.


BROOKS NELSON: I think that concludes most of our discussion. Let's move to final comments. Anne, the floor is yours. What's your overall take today?


ANNE OLIVER: I am really excited to see where the IRS goes in the next 10 years. Assuming some or all of the funding doesn't get clawed back, this is a really great infusion of cash to the IRS to be able to make some really big changes that have been needed for decades.

ANNE OLIVER: I very much appreciate that the focus appears to be on the taxpayer experience and serving taxpayers better. So I'm very hopeful. I'm cautiously optimistic, but very hopeful that in the next 10 years we'll see a lot of great improvements at the IRS that will make our jobs easier and our clients' lives better.


BROOKS NELSON: Sarah?


SARAH MCGREGOR: Same thing. I am hopeful that this is going to be good. I'm looking forward to being able to exchange emails, have more online interactions, and have less posting through the mail or waiting to talk over the phone.

SARAH MCGREGOR: Maybe even Zoom calls and Teams calls and some more virtual interactions as well to smooth things and move them faster. The rest of the business world has moved along in that direction, and I think it's time for our interactions with government operations to move in that direction as well.

SARAH MCGREGOR: However, I fully expect in 50 years that people will be looking back at quotes from today and applying those to the IRS in another 50 years.


BROOKS NELSON: That was going to be my thought. I'm not quite as optimistic. I think the intent is there. I think a technology solution is going to take a long time. Long time, relatively speaking, means three to five years, you would think. They're going to need something like that to make the overhaul that is needed.

BROOKS NELSON: I love the fact that they're hiring people, but there's just no way they can hire that many people who are qualified to do the job. So I think, kind of like Anne alluded to earlier, we're going to be swapping not getting the phone answered with getting the phone answered by people who don't know what they're doing in many cases.

BROOKS NELSON: We'll see. But I think we all can agree it's a step in the right direction when we're talking about investing in technology and customer service.

BROOKS NELSON: We'll see what happens with all the enforcement people. To be determined on that front.


SARAH MCGREGOR: That's right.


BROOKS NELSON: That's a wrap on today's discussion on the recent and future activity of the IRS. It will be great indeed if they achieve their taxpayer service goals.

BROOKS NELSON: Thank you for listening in. A quick disclaimer: we're not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, about your specific tax issues or to discuss information from today's podcast.

BROOKS NELSON: Check out the firm's website at cbh.com for the latest guidance and materials on this and other tax and business topics. That concludes the podcast. Please like, share, and subscribe.

BROOKS NELSON: Thank you, Anne. Thank you, Sarah. Thank you, our listeners, for spending your time with us. We truly appreciate it. Let's call it a day and go forth in peace.