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Yellen directs IRS to embark on $80 billion overhaul plan

Treasury Secretary Janet Yellen.Jacquelyn Martin/Associated Press

A day after President Biden signed into law a sweeping climate, health, and tax bill that included $80 billion in funding for the Internal Revenue Service, Treasury Secretary Janet Yellen directed her agency to develop an operational plan for deploying the funds, kick-starting an overhaul of the beleaguered tax collector.

In a memo to the IRS commissioner, Charles P. Rettig, Yellen mapped out her top priorities, including clearing a backlog of unprocessed tax returns, improving taxpayer services, revamping antiquated technology, and hiring thousands of new employees.

The new law, known as the Inflation Reduction Act, “provides the IRS what it has needed for years — a stable stream of mandatory funding that will allow the agency to serve American taxpayers the way they deserve and to enforce the tax laws against high-net-worth individuals, large corporations, and complex partnerships who today pay far less than they owe,” Yellen wrote in the memo, which was viewed by The New York Times.

The money will be used to hire new tax enforcement agents, expand depleted taxpayer-services teams (which leave most customer service calls unanswered) and upgrade outdated technology systems. The $80 billion over a decade will be a substantial infusion for an agency that had a budget of $13.7 billion in 2021.

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Yellen directed the agency to draft the plans within six months, and she tapped her deputy, Wally Adeyemo, to work with Rettig to develop the new initiatives and timelines. The plan must have metrics for its various areas of improvement so that Congress can hold the agency accountable.

More funding for the IRS has triggered a heated political debate, with Republicans suggesting that the Biden administration plans to hire thousands of enforcement agents to audit small businesses and the middle class. The Treasury Department projected that the agency would hire about 87,000 new employees over the next decade to more than compensate for an expected wave of 50,000 retirements in coming years. Most of those hires are expected to work in technology and customer services roles.

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In her memo, Yellen reiterated that a bolstered IRS would be focused on cracking down on rich tax dodgers and big companies that have long evaded paying what they owe to the federal government. She also promised that middle-class households would not face more onerous scrutiny and that their audit rates would not rise.

“These investments will not result in households earning $400,000 per year or less or small businesses seeing an increase in the chances that they are audited relative to historical levels,” Yellen wrote. “Instead, they will allow the IRS to work to end the two-tiered tax system, where most Americans pay what they owe, but those at the top of the distribution often do not.”

The IRS has struggled for years amid budget cuts engineered by Republicans, who have accused the agency of targeting conservative groups. Since Biden’s election, Republicans have tried to block the agency from gaining additional resources, warning that the agency would be weaponized by Democrats.

While it remained unclear until recently whether Congress would pass the additional funding, the Treasury has spent nearly a year developing plans to upgrade the IRS. Adeyemo and Rettig recently held a two-day planning meeting to devise a strategy for the IRS in the event that the money was approved, and contingency plans if it were not.

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Yellen said in her memo that she was prepared to approve the use of funds quickly so that the IRS could improve services for the filing season that will begin next year.

As the Biden administration enacts changes to modernize the IRS, another important priority will be selecting a new commissioner to carry them out. Rettig’s term ends in November.