What The IRS’s 2021 Data Book Says About Tax Administration
Like nearly everyone else, the IRS has experienced an unsettling couple of years, but the agency has been working toward rebuilding, especially over the past year.
The recent release of its 2021 data book shows an agency grappling with some significant lingering problems, particularly in the area of technology, while navigating a path forward on its core responsibilities of administering the tax laws and collecting the revenues that fund the federal government.
The data book is primarily an exercise in transparency, which is critical for the tax system. Some of its highlights include that the IRS has a combined 81,623 employees in the agency and the Office of Chief Counsel and that it collected more than $3 trillion in taxes in 2021, which is about 96% of the funding for the federal government.
For tax year 2019, there were over 205 million returns filed, and the IRS examined 0.55% of individual returns filed for tax years 2011 through 2019 (0.92% of corporate returns filed for the same period).
One of the themes that the IRS emphasizes in the data book and progress report is that, particularly during the pandemic, the agency has been part of the recovery effort and has taken on a benefits delivery role in an even more pronounced way.
IRS Commissioner Charles Rettig pointed out that the IRS was charged in 2021 with delivering two rounds of economic impact payments — including to people who didn’t otherwise have to file an income tax return, which presented a substantial and novel outreach challenge.
“We extended our reach far beyond our normal contacts to many lower-income, military, veterans, retired, older, limited English proficient and homeless communities around the country,” he explained in the progress report. Congress also made changes to the earned income tax credit and the child tax credit, including monthly delivery in the last half of 2021, that the IRS was charged with implementing.
In response to its evolving role, the IRS enlisted the help of community and national organizations for outreach. Rettig wrote that “our message to these groups was and continues to be, ‘Help us help others.’”
The IRS has long been the administrator of various tax benefits enacted by Congress, but the scope of that function has expanded dramatically during the past few years. It remains to be seen whether that shift will be durable or whether it was a temporary episode in the agency’s history caused by the extenuating circumstances of the coronavirus crisis.
Enforcement Gaining Steam, but Not That Fast
The IRS performs many functions, but enforcement of the tax laws is chief among them. The agency reported that it spent $5 billion on enforcement in fiscal 2021.
Accordingly, it touted its audit rates for 2019, particularly the increase in audits of taxpayers with high incomes. The biggest jumps in audit rates between September 2021 and May 2022 started with taxpayers with a total positive income of $500,000 and increased as incomes climbed.
Taxpayers with incomes over $10 million in 2019 had an audit rate of 8.7% as of May 1, 2022, according to the IRS. That’s the highest audit rate of all income groups — by far.
The other rates range from 0.2% for returns with a total positive income of between $25,000 and $500,000 to 2% for returns between $5 million and $10 million.
The IRS noted that there are only about 6,500 revenue agents in the field performing exams in the high-end noncompliance area because of resource constraints, so that while audit rates at high incomes are picking up, they’re still far below the rates that the IRS had reported for audits of 2010 income tax returns.
The IRS is notoriously behind the times in buying and implementing new technology, mostly because of the costs of replacing its museum-piece computers.
The data book explains that the agency spent $348 million on business systems modernization, which is a thin slice of its $13.7 billion budget but should help it move into the 21st century a little faster because that spending funds capital asset acquisition of information technology systems. Spending on modernization was up from $299 million in 2020.
One of Rettig’s frequent points about the IRS’s recent improvements is that the agency has expanded its taxpayer services by offering support in multiple languages.
In 2021 the IRS made Form 1040 available in Spanish for the first time; released Schedule LEP, which allows taxpayers with limited English proficiency to indicate to the IRS the language in which they would like to be contacted; and published Publication 17, “Your Federal Income Tax,” in English, Spanish, Chinese (traditional and simplified), Vietnamese, Russian, and Korean.
The IRS is always facing new challenges, some of which aren’t completely outside its control. The data book suggests that the agency is working to ameliorate identified problems and provide a higher level of service to taxpayers, which seems like a reasonable approach considering the tumultuousness of the past few years.