Natasha Sarin, a Post contributing columnist, is an associate professor at Yale Law School. Previously, she served as deputy assistant secretary for economic policy and later as a counselor to Treasury Secretary Janet L. Yellen.
Signed into law a year ago this week, the Inflation Reduction Act included historic investment in modernizing the Internal Revenue Service, providing the agency with the resources it needed to serve American taxpayers and to pursue tax cheats not paying their fair share.
The need for investment was clear: The IRS had been gutted. Adjusted for inflation, its budget had declined by nearly 20 percent over the previous decade. Taxpayer service, as well as high-end enforcement, meaningfully declined.
Decimating the IRS budget also prevented the agency from much-needed technological advancement. A year ago, when one walked into some IRS offices (as I did while working at the Treasury Department), you saw boxes of returns everywhere awaiting processing. Employees removed staples by hand.
When the IRS finally received the funding it desperately needed, it was both a relief and a challenge. The IRS does not have the luxury of shutting its doors while it retools for the 21st century. It has to do its work, process returns and modernize all at once.
The Inflation Reduction Act’s funding was a 10-year investment, and it takes time for new resources to pay off. Leading up to the law’s passage, I had cautioned not to expect miracles overnight.
I was wrong. We’ve gotten some miracles. Here’s what the IRS delivered for taxpayers in the last year:
The IRS processed more paper returns last year than any year in recent history, and all but eliminated the pandemic backlog. That by itself is pretty miraculous.
As one vivid example, a cafeteria in Austin that served as storage space for unprocessed returns, went from looking like this:
But the IRS is also making progress toward a more important goal. Over the next few years, the IRS will fully digitize. That means it will offer electronic filing and correspondence options to all taxpayers, so that no one has to send in paper (unless they want to). Additionally, by 2025, the IRS plans to scan all paper returns it receives.
Scanners might not seem revolutionary, but for the IRS they are. They mean that taxpayers who choose to file by paper will see processing times cut in half. The IRS workforce, which today has six to eight employees involved in transcribing each paper return, will be able to focus more on improving the taxpayer experience instead.
Ultimately, for the Inflation Reduction Act to be judged a success, that transition must be completed. We’ll know more about how they’re faring at next year’s anniversary.
Before the Inflation Reduction Act’s passage, the IRS didn’t have enough employees to answer when taxpayers called. Instead, they hung up on those who called during peak periods, a so-called “courtesy disconnect,” knowing there was no way the call would be answered. This was better than wasting callers time — but not by much (and it certainly didn’t feel very courteous).
During the 2022 filing season, IRS phone service reached a nadir, with just 18 percent of callers receiving assistance from a service representative. The IRS has reversed this trend. This past filing season, it hired thousands of customer-service representatives and answered nearly 90 percent of calls. Average wait times dropped from 29 to 4 minutes.
This remarkable increase in service led the National Taxpayer Advocate, an independent watchdog within the agency, to begin its mid-year report to Congress celebrating progress: “What a difference a year makes!”
Over the past decade, IRS in-person assistance declined by half as the agency was forced to close taxpayer assistance centers, particularly in rural areas, because it did not have staffing capacity.
In the past year, however, the IRS has opened or reopened 35 Taxpayer Assistance Centers across the country and served over 100,000 more taxpayers in person this year than it could last year.
Between 2014 and 2016, the top 100 wealthy nonfilers cost the IRS about $10 billion in uncollected taxes. The Treasury inspector general noted that the IRS did not even work these cases because it didn’t have enough staff to do so.
The IRS committed to pursuing high-end tax evasion even before the Inflation Reduction Act, but its efforts have kicked into high gear since the law passed: The agency resolved 175 tax delinquency cases against millionaires in recent months, bringing in nearly $40 million. (In one such case, an individual used owed funds to purchase a Maserati and a Bentley.)
To be sure, there’s still far to go. It will take time for the agency to ramp up high-end enforcement. Today, partnership audit rates are approximately zero, and millionaire audits have declined by about 80 percent over the past decade. New hires will take years to train, and these cases often involve highly complex structures.
But the payoff will be significant: My work with Mark J. Mazur, a former assistant treasury secretary for tax policy, suggests the agency will collect upward of $500 billion from these efforts over the next decade. And the total might well be higher. Recent work suggests every $1 spent auditing high-income individuals means more than $12 in additional tax revenue.
Just how significant will depend on how quickly the IRS is able to onboard experts in high-end enforcement and undertake more of this work — again, we’ll know more in the years ahead.
It takes the average American eight hours and $140 to file taxes. Compare that to Sweden, where taxpayers fulfill their obligations by responding “yes” to a text message. Much of that difference has to do with our complicated laws: Congress acting to simplify the tax code is critical to a better filing experience.
But the IRS is trying to ease the burden, too. Next filing season, the IRS is launching a pilot program to test a free online tool for taxpayers to prepare and file their taxes directly with the agency. Estimates suggest offering such a tool will cost the IRS somewhere between $9 and $16 per return, but it will save taxpayers who use the tool more than eight times that, on average.
All this is great progress, but the IRS still has a ways to go toward building a fairer tax system. The agency recently confirmed results from academic research showing Black Americans are audited at disproportionate rates, and while the IRS is committed to addressing these disparities, it doesn’t yet have a plan for how. Its direct file pilot is exciting, but it will need to balance new offerings with necessary technological upgrades, such as finally retiring the IRS Master File — the oldest IT system in the federal government. That’s a hard balance to strike.
Ultimately, what the agency needs to succeed are stable resources — and time. Unfortunately, the IRS finds itself and this new funding amid political maelstrom. Clawing back these new resources is a first-order priority for some Republican lawmakers, who have already successfully pushed to take back a quarter of these funds in the debt ceiling deal. Funding battles will continue in the months ahead.
That’s unfortunate, and I hope they will fail, because Americans are finally starting down a path toward the tax system that they deserve.