The United States Internal Revenue Service (IRS) announced (IR-2023-72) the publication of its Strategic Operating Plan (Plan), with an outline of how it will spend the almost $80 billion allocated by the Inflation Reduction Act of 2022 (IRA) from now through FY 2031. The Plan was requested by US Treasury Secretary Janet Yellen in August 2022.

The IRA provided funding in the IRS's four appropriation "buckets," allocating $47.4 billion to enforcement, $3.2 billion to taxpayer service, $25.3 billion to operations support, and $4.8 billion to business systems modernization. The IRS cannot transfer money among those buckets without congressional approval.

Overall, the IRS said it will pursue five main objectives:

• Improve taxpayer services
• Quickly resolve taxpayer issues
• Focus expanded enforcement on complex tax filings and high-dollar noncompliance issues
• Deliver cutting-edge technology, data and analytics
• Hire and retain a highly-skilled, diverse work force

Within each of these objectives, the IRS identifies a total of 42 initiatives, indicators of success, milestones and interdependencies. It also provides a high-level breakdown of expenditures and a roadmap sequencing the various initiatives.

Taxpayer service

The Plan notes significant customer service improvements and technology modernization, including increased online access and interaction, and the IRS's intent to digitize and better use available data. The IRS also wants to shift to earlier, more front-end interactions to help taxpayers "get it right," rather than engaging with taxpayers post-filing and potentially years after filing.

Enforcement

As the IRS has said repeatedly, it plans to increase its enforcement focus on areas with complex issues and complex returns, such as those related to high-income taxpayers and large partnerships and corporations. The Plan reiterates the Treasury Secretary's commitment that IRS will not increase audit levels relative to historic levels for taxpayers earning less than $400,000.

The IRS specified that it will pursue enforcement of issues such as digital asset transactions, listed transactions and certain international issues. The IRS also said it will increase enforcement in other key areas, including employment taxes, excise taxes, and estate and gift taxes. In addition, the IRS will continue to work on implementing the energy security and clean energy provisions in the IRA.

The IRS also plans to combine its compliance-planning and strategy functions to better identify potential high-risk compliance cases, initially using existing systems and analytics, but eventually moving to new analytics systems and better risk-based case selection.

Large corporations and partnerships

For large corporations and partnerships, the IRS said it will increase audit rates and other compliance treatments by using data and analytics and pursuing noncompliance through a variety of mechanisms, including audits and non-audit contacts.

The IRS said large corporations have complicated tax filings that involve issues such as cross-border activities, financial product issues and transfer pricing transactions. Regarding large partnerships, the IRS said, "[b]ecause of their size and complex structure, partnerships require specialized capabilities and often significant resources to audit."

Funding caveat

On funding, the IRS Commissioner's introductory message is very clear. The Plan relies on the US Congress (Congress) to maintain the IRS's annual appropriations at FY 2022 levels with increases for inflation and pay raises so that the IRA funds can be used to transform the agency. Without that, IRS will have to shift IRA funds to general operations, cutting back on the initiatives noted in the Plan.

Implications

The Plan — even at 150 pages — is a high-level document containing the IRS's vision for upgrading tax administration and the taxpayer experience. It focuses most heavily on service improvements and displays the interdependencies between those, the enforcement enhancements, and the technology upgrades that underpin both. There will still be significant effort required as the IRS details the work needed to achieve the initiatives in the Plan.

Taxpayers should continue to experience service enhancements in the near-term and beyond, while noticing significant enforcement changes farther out. That, however, will be affected by how Congress handles the IRS's annual appropriations and whether Congress, at some point, claws back the IRA funding.

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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor