IRS expansion - the Inflation Reduction Act Funding Explained

On August 19, 2022, President Biden signed the Inflation Reduction Act (IRA) in the summer of 2022. The Act had many objectives, including lower prescription drug pricing, reducing climate change, and reallocating the share of taxes. 

Along with its stated primary goals, one of the provisions making headlines was more funding for the IRS. First, we’ll look at the Act, how it will affect your taxes, and what you can do to prepare for upcoming changes.

What is the Inflation Reduction Act?

The Inflation Protection Act was signed on August 19, 2022. Despite its name, few of the provisions in the bill relate directly to inflation reduction efforts. Some of the provisions in the law went into effect immediately, while others will affect policy over the next few years.

The law implemented changes to make health care and prescription drugs more affordable, fight climate change, and require large businesses to pay higher tax rates. Here are some of the main changes in the Act:

  • The IRA imposes a 15% minimum tax on corporate profits with over $1 billion in income. This exempts most small corporations from the provision.
  • Medicare will be able to negotiate prescription drug prices, which was not previously allowed. This should reduce prescription drug costs for Medicare recipients.
  • The Act also extended increased subsidies available under the Affordable Care Act (ACA). This makes health insurance more affordable for millions of taxpayers.
  • On the climate change front, the Act included increased tax credits for solar panels and incentives for companies to invest in clean energy alternatives.
  • $80 billion was earmarked for increased IRS funding to increase compliance and update the agency’s internal systems.

inflation reduction act irs expansion

How Much Funding from the Inflation Reduction Act Was Included for the IRS, and What Was it For?

$80 billion of additional funding from the Inflation Reduction Act was included for the IRS.

The IRS currently has an annual budget of $13.7 billion. The agency will receive $80 billion in additional funding between 2022 and 2031, increasing its operating budget by $8.9 billion annually, a nearly 65% increase. The funding has several specific objectives.

$46.5 billion is for enforcement activity.

The most significant portion of the new budget is for staffing. The IRS will hire and train new staff, including auditors and customer service representatives. They expect to hire 87,000 new employees over the next several years. However, some of the new hires will replace retiring employees. It will take several years to identify candidates and train them.

$25.3 billion is for operations. 

This portion of the funding is meant for routine costs such as rent, facilities, printing, postage, security, telecom, and information technology. 

$3.2 billion is for taxpayer services. 

This includes representatives who manage filing and account services, pre-filing assistance, and taxpayer education. The goal is to provide more information for taxpayers and increase the number of calls answered. Currently, the agency answers less than 10% of the calls received.

$15 million is for research into a free filing system. 

Though this is a relatively small expense, it could have a significant impact on many taxpayers. A free filing system would cover most simple returns and would likely be available to over 40 million taxpayers. Note that the funding is for investigating the feasibility of such a program, not the development of the technology to manage it.

$4.8 billion is for its Business Systems Modernization project. 

This IRS currently runs on outdated technologies, causing severe backlogs in processing manual returns and adjusting to electronically filed returns. In addition, several of the IRS programs are COBOL, which is an ancient programming language only used by a few programmers. 

What Does $46.5 Billion in IRS Enforcement Mean for Individuals and Businesses?

Taxpayers can expect an increase in audits over the next few years. However, it’s unlikely that there will be an immediate change. It will take the IRS to find candidates to fill the auditor roles and train those individuals. Industry experts expect recruiting to be even more difficult because the increase in audits will lead to a higher demand for tax professionals in the private sector who will need to respond to those audits.

The IRS has also outlined specific areas of focus for the future audits. 

Land Conservation Easements. 

Easements are agreements between an individual (or business) who owns the land and a government agency. In a land conservation easement, the taxpayer agrees not to develop and save the land for conservation purposes. The government allows a charitable deduction for such easements.

In recent years, some investors have purchased land, obtained an inflated appraisal of the land value, and then deducted the inflated value as a contribution on their return. The IRS plans to use some of the enforcement funding to crack down on this practice.


Cryptocurrencies have been in the news for their wild price swings and celebrity endorsements over the past several years. Though federal law requires taxpayers to report all income on their returns, most cryptocurrency transactions have gone unreported because there was no requirement for any exchanges or individuals to issue tax documents for the transactions. 

In 2023, cryptocurrency exchanges will be required to report transactions, but this still leaves peer-to-peer transactions relatively undocumented. The IRS plans to step up enforcement and investigation of these transactions to ensure taxpayer compliance.


While tax returns and income reporting is relatively straightforward for most individuals, business income and expenses have more room for interpretation. As a result, the IRS plans to increase audits of businesses to ensure that all income is being appropriately reported and the business operations justify the expenses.

The IRS will also likely increase the audits of business owners to ensure that the business income from pass-through entities records on the taxpayers’ individual returns. 

Some Good News

The news isn’t all bad for some individuals and small businesses. The Treasury Department has issued an order to prevent the IRS from increasing the number of audits on these groups. Individuals protected under this order are those making less than $400,000

Skeptics believe the order is hard to enforce and will have little impact on how the IRS chooses which returns to audit.

However, Critics of the Inflation Reduction Act Are Skeptical and Insist

Not everyone is a fan of the Inflation Reduction Act. Various voices are rising against the Act, arguing that it will potentially increase inflation and unfairly tax small businesses that are already struggling to recover from the impact of the pandemic.

On August 7, Senator Crapo offered an amendment during consideration of the “Inflation Reduction Act” to prevent the IRS from using any of the $80 billion of funding for audits on individuals and small businesses with taxable incomes below $400,000.

Senate Democrats rejected the amendment along party lines, 50-50. 

The National Federation of Independent Business called the enforcement efforts an “indirect tax” that would burden small businesses with more audits and examinations.

Though the use of funding has specific earmarks, time will tell how the IRS will spend the additional funding.

What to do?

The IRS will need time to complete their hiring and train new auditors. This allows you to get your books and records in shape before they start increasing audits.

Self-employed individuals are particularly vulnerable to increased auditing. There are several flags that can trigger an audit, including large travel expenses, excessive meals, entertainment deductions, or substantial revenue. Therefore, self-employed taxpayers should review their expenses to ensure that they meet the IRS criteria of being necessary and customary for their line of work.

IRS auditors can go back up to five years for most returns. If there is suspicion of fraud, there is no statute of limitations on investigating your returns. Most audits only look at the most recent three years of returns. Because of the delay in bringing new auditors up to speed, the most important thing is to start maintaining accurate books and records going forward, rather than trying to recreate records from prior years.

If you spot errors in previously filed returns, now is the time to file amended returns. Make sure your amended returns reflect your income and expenses accurately.

Final Thoughts About the Inflation Reduction Act IRS Funding

Though there is no immediate reason to panic (and no reason to panic if you’ve followed the tax reporting rules), now is the time to ensure all your documentation is in order. Though the new enforcement’s scope should only include taxpayers making more than $400,000 a year, it will likely affect taxpayers at all income levels. 

Cryptocurrency investors should also be ready to include crypto transactions in future tax returns. The expanded IRS will carefully examine crypto transactions.

Have questions about how a potential IRS audit, spurred by the Inflation Reduction Act IRS funding, could affect you and your business? Our tax pros can help you sort all your questions out. Contact us for a free tax consultation.


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