TL/DR –
The U.S. Department of the Treasury and Internal Revenue Service (IRS) released a new analysis suggesting the Inflation Reduction Act (IRA) could increase revenue by up to $561 billion between 2024 to 2034, through the modernization of the IRS. The estimate includes revenue generated not only from direct enforcement activities but also from improvements in technology, data, and services. If IRA funding continues as proposed, the revenue could rise to as much as $851 billion; rescinding the funding would decrease revenue and impact efforts to enhance tax compliance among wealthy individuals and corporations.
New Analysis: Inflation Reduction Act Boosts IRS Revenue
The U.S. Department of the Treasury and Internal Revenue Service have shared an analysis projecting the Inflation Reduction Act (IRA) could increase revenue by $561 billion over 2024-2034, higher than previous estimates. If renewed, the IRA could generate as much as $851 billion.
Revenue from IRA Funding
Early estimates of IRA revenues were solely based on revenues from direct enforcement activities due to increased enforcement staffing. However, the latest paper, “Return on Investment: Re-Examining Revenue Estimates for IRS Funding,” argues that the technology and service enhancements enabled by the IRA will significantly boost revenues.
The Impact of IRS Modernization
“IT modernization brings many potential revenue benefits including increased compliance, improved audit selection, and better collection planning,” the paper reveals. “The experience of California, which undertook substantial tax administration modernization, demonstrates these improvements can significantly enhance revenue.”
New Revenue Estimates for IRS Funding
These figures are an important step in developing comprehensive revenue estimates for IRS funding. They factor in the benefits of improved technology, data analytics, and service, as well as the deterrence effect on audited wealthy taxpayers, emphasizing the need for further research.
The Impact of IRA Recession
Plans to repeal the IRA could prove costly, with a $20 billion rescission potentially reducing revenues by over $100 billion. The proposed repeals would shorten IRA enforcement funding by around two years, lessening revenue in 2029 and subsequent years. On the other hand, extending IRS investments could collect $851 billion over 2024-2034.
IRS Funding Cuts and The Tax Gap
IRA investments in the IRS were crucial after a decade of deep funding cuts resulted in substandard service levels, deferred technological upgrades, and weakened enforcement. The tax gap has grown to more than $600 billion annually due to these cuts.
IRA’s Role in Tax Collection
The IRA is empowering the IRS to ensure wealthy taxpayers and big corporations pay their fair share. The IRS has already announced several initiatives targeting these groups, including expanded audits, focus on underpaying foreign-owned corporations, and collecting tax debt from millionaires.
Benefits for All Taxpayers
Finally, the IRA SOP outlines how the IRS will utilize IRA resources to provide world-class customer service, clearer tax filing guidance, more electronic filing options, and better online accounts, helping taxpayers get their filings right the first time.
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