Thanks to funding included in the Inflation Reduction Act, the IRS is planning compliance initiatives several years out, according to two agency officials speaking on May 17.
“If you’re familiar with the IRS in some form or fashion, you’re aware that funding has been a concern for the past 13 to 15 years,” said Paul Mamo, IRS assistant deputy commissioner for services and enforcement. “We’ve been operating in austerity for a long time. Having funding for several years out rather than worrying about the immediate budget cycle is fantastic.”
Mamo spoke at the 41st Payroll Congress in Denver along with Dan Lauer, director of examination for the IRS’s Small Business and Self-Employed Division.
“Think about everything that has happened,” Mamo said, “all of the acronyms that have been added to our vocabularies – TCJA, IRA, ACA, the CARES Act, EIP payments, unemployment, the advance child tax credit. All of these events, these pieces of legislation, they don’t come with funds. It’s hard to innovate in one space and keep the trains running on the other side. So, we’re excited to have this money.”
Treasury Secretary Janet Yellen laid out an ambitious plan for the IRS that starts and ends with improving customer service. “The core pieces,” Mamo said, “are hiring people and having the technologies and tools in place that will enable the IRS to execute its mission on behalf of taxpayers.”
Employee Retention Credit
Right now, the IRS is focused on “those three favorite letters – ERC – employee retention credit examinations,” according to Lauer.
“People think there’s a lot of fraud associated with the employee retention credit – and there is – but what I want to communicate to you is that are a lot of technical issues around a very complex credit, and there’s a lot of nuances and there’s three different legislative acts. So, there’s a lot to it, and it’s not as simple as ‘I was in business, I paid my employees, I should get this credit,’” Lauer said.
Notably, Mamo identified the ERC as the number one scam on the IRS’s dirty dozen list.
“One thing I find very perplexing is folks who go to their regular return preparer, who says, ‘I’m sorry, you don’t qualify for the credit,’ and then they go to someone else who says, ‘Come right in, sit down here for a few minutes and we’ll get you your $3 million back,’” Lauer said.
Anyone who can qualify someone over the phone or over their computer system in 10 minutes must be using artificial intelligence, Lauer said. “Because I don’t see how they can.”
Invariably, they are not performing their due diligence and asking the proper questions, he said. Are they asking where you operate your multiple businesses and whether the government orders to suspend operations were issued by the federal, state, or local government? Are they asking about the pecking order of the different credits available to the business and employees? Because the components used in one credit cannot be used in another. Did they talk to you about the fact that if you take this credit you have to reduce your wages on your income tax return?
“When the employee retention credit took fire, all of my agents had full caseloads,” Lauer said. “We had to work our way through the work in progress before getting to the credit retention cases,” he said. During filing season, many agents were reassigned to answer telephones, and amended returns piled up. “We’ll be working on these returns for the next couple years,” Lauer said
Next Up
After agents work through the ERC examinations, IRS plans to focus on withholding compliance, Lauer said. Backup withholding seems to confuse a lot of employers, he said, so that deserves attention. Also, withholding for nonresident aliens. “There’s a lot of confusion over treaties and visas and how they impact income and Social Security taxes,” he said.
IRS will focus more on auditing large employers and away from auditing smaller businesses, Lauer said.
IRS also plans to “take a more aggressive posture on worker classification,” he said, adding that it is important to maintaining our Social Security system. “Some industries have gotten a bit out of control,” without mentioning specifics.
“I don’t think a lot of people around the country realize how important the administration of payroll is to our tax system,” Lauer said.