The IRS Just Got $80 Billion in Funding. Here's What That Money Will Likely Go Toward

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  • The IRS has been underfunded for years.
  • The agency is getting a big cash infusion and is expected to put it to good use.
  • The IRS will likely focus on clearing unprocessed returns and updating their technology.

It's good news and bad news at the same time.

You'd think that an agency as important as the IRS would get priority when it comes to things like financial resources. But the reality is that the IRS has been extremely underfunded for years.

That's changing, though. Recently, the IRS received $80 billion in funding as part of President Biden's Inflation Reduction Act. And now, the agency is being asked to come up with a plan that outlines how it will use that money.

Treasury Secretary Janet Yellen has identified a few priorities for the IRS to tackle. Here's where taxpayers can expect the agency's funding to go.

1. Clearing a backlog of unprocessed tax returns

As of early August, the IRS had close to 10 million unprocessed individual tax returns from 2021 to wade through. Although taxpayers are commonly advised to file their returns electronically, many ultimately opt to go the paper route.

Paper returns have posed a challenge for the IRS because they need to be processed manually. Since the agency has been understaffed, it's fallen behind on processing paper returns, which means many filers may still be waiting for their 2021 tax refunds to hit their bank accounts.

2. Improving customer service

Anyone who's ever needed to put a call into the IRS with a tax question can probably attest to the fact that it's been a challenging process -- especially during tax season. The hope is that the IRS will use some of its funding to improve the customer service experience and cut down on wait times to speak to an agent.

3. Updating the agency's technology systems

It's not particularly shocking to learn that much of the technology the IRS uses is outdated. But upgrading it could lead to a number of improvements for taxpayers, including easier access to tax-related information and faster refunds.

4. Hiring more staff

The IRS expects 50,000 of its workers to retire within the next five years. The hope is that the agency will be able to use some of its funding to ramp up on hiring and replace those workers who are leaving.

Will audit activity pick up?

Clearly, the IRS has its share of work to do now that it's getting more money to work with. But will an uptick in funding lead to more audits?

It could -- but taxpayers shouldn't panic. Yellen has specifically stated that additional IRS funds should not be used to increase the share of audits for households earning under $400,000. This means that while the average taxpayer's audit risk isn't increasing, higher earners may be more likely to get audited in the future once the IRS has the resources to dig deeper into a larger number of returns.

However, higher earners don't have to panic either. Getting audited often isn't the harrowing process the media might make it out to be. And higher earners who are honest on their tax returns by reporting all of their income and only claiming legitimate deductions may find that they're able to stay off the IRS audit list as they've done in the past.

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