As we continue to explore the potential outcomes of the US presidential election on financial institutions and fintechs, it seemed like a suitable time to take a second look at income taxes, one of the key components of every company’s
financial planning and ongoing management.
Turns out, a particular piece of two-year old climate change mitigation legislation - the Inflation Reduction Act (IRA)- is creating a new atmosphere of greater efficiency and effectiveness with the US Internal Revenue Service (IRS),
and that’s something any American should welcome. How this has happened shouldn’t be a surprise for those who really investigated the
bill’s 274 pages before it was signed two Augusts ago, but the results might lead to a rude awakening for many high-income taxpayers.
Nobody likes taxes, right? But everybody likes to pay
less in taxes, or at least no more than their fair share. This is especially true for most larger financial entities and their corporate customers and partners, which thanks to favourable legislation, relentless lobbying efforts, and ever more able tax
accounting experts, are generally paying the lowest rates on income generated of any
period in the past 75 years. That’s thanks to the flat 21% corporate tax rate initiated under the Trump administration and in effect since 2018.
Meanwhile, under the same policy, millions of smaller businesses are paying
more tax (as a percentage of income) than they did before 2018. Nobody is sure just what the next administration will bring the American taxpayers, large or small in terms of tax rates and policies. However, it’s entirely possible that some of the
country’s larger corporations may be paying more soon, if they aren’t already, especially those being targeted now by the IRS for underpayment of tax obligations in the recent past.
The IRS could be saving the taxpayers hassle, and making them more money
It might be surprising to many just how much emphasis the US IRS – the agency nearly everyone loves to hate - has recently placed on improving service and returns.
In this case, we don’t explicitly refer to the dreaded documents called ‘tax returns,’ but instead to financial returns into the country’s coffers. That said, benefits on both sides might actually apply.
The US tax authority, nominally in place in the US since at least the administration of President Abraham Lincoln in
1862 and officially a Bureau of the Department of the Treasury, is - despite all of the complaints to the contrary - remarkably efficient, according to its own
website. They claim: “The IRS...is one of the world's most efficient tax administrators. In fiscal year 2020, the IRS collected almost $3.5 trillion in revenue and processed more
than 240 million tax returns...The IRS spent just 35 cents for each $100 it collected in FY 2020.”
According to its current administrator, the goal of the IRS – with recently arrived, and long-awaited, full(er) funding from Congress via a portion of the IRA’s budget – is to achieve more efficient operations, better customer support,
and improve collections effectiveness, whether at the consumer or corporate level. Of course, ‘improving’ might also mean that more will be paying more of their ‘fair share’ of tax bills due. This is even though it’s important to note that the actual percentage
of their income paid by large businesses is as much as 60% less now than in previous decades – when 30-40% or even higher corporate income tax brackets were common for all but the smallest business sectors.
Per its most recent quarterly update, at least some of the credit for the US tax agency’s renewed emphasis on raising quality and financial goal attainment must go to its receipt and usage of IRA
funds.
Indeed, the legislation signed almost two years ago by President Biden was and is extremely broad-based in focus. It was initially designed and targeted at promoting investments in renewable energy, community sustainability, and innovative
solutions to help cities and states combat rising greenhouse gas emissions and the generally increasing negative effects on humanity and the biosphere of a changing world environment.
However, the real answers on the IRA’s intent and impacts are a bit more complicated than that – as is often the case when politics are involved. In fact, it’s how the Act’s promised and projected benefits are actually being achieved
– through a variety of private and public sector programs and policies – that truly matters to most. This is most definitely the case with the IRS’s use of its allocated funds.
Tax fairness is in everyone’s interest – how the IRA is moving the IRS forward for all
As US national elections have captured so much of the country’s and world’s news coverage this summer – and likely will continue to do so through November – it’s helpful to get an update on just what the most massive, far-reaching infrastructure
and spending bill passed and signed in the past several decades is really delivering across the country.
According to the IRS, funds parsed to it as part of the Act's rollout are helping it carry out its mission. The money is being deployed creatively and assertively and will yield substantial benefits beyond any individual, local, or even
US-centric positive impacts.
The IRS says that IRA-facilitated spending already completed is making a huge dent in addressing their key service priorities. Further, they expect investments for the rest of 2024 and the next two years under the legislation’s parameters
will help the country and its citizens to be increasingly resilient, better prepared, and more financially viable (that’s where increased tax collections from those currently underpaying come in) to tackle climate change impacts now,
and other related or emerging calamities in the future.
How the IRS is spending its IRA money, and where the efforts are bearing fruit
The IRS states that its share of funding from the IRA is helping the agency to “spur innovation and improvement across the IRS to transform our operations in our work
to help taxpayers and the nation.”
A report issued by the agency in
late July lists significant expansions in digital features and forms libraries and procedures for both individuals and commercial entities, including simplified payments functionality and easier access to tax-related data and tools.
Business Tax Accounts are now even available in Spanish, reflecting the U.S.’s increasing Hispanic population and enabling Hispanic-owned enterprises to find all their
tax information and functions in one place and in language they can quickly understand. Another example of successfully digitalised procedures involves amended returns, which can now (finally, many taxpayers would say) be filed electronically. Finally, mobile-adaptive
design made possible by new funding now provides taxpayers with ways to fill in data on 30 common “non-tax” forms through mobile devices and tablets and then securely submit them, instead of mailing them to the agency as had previously been the requirement.
According to IRS commissioner Danny Werfel, quoted in the July quarterly update on the
IRS Strategic Operating Plan
for its use of IRA appropriations, many of the recent innovations and improvements in the agency’s operations can be directly attributed to receiving IRA funding, in many instances for long-planned but never-implemented projects. “This progress can be seen
in our continued expansion of our online accounts to provide more features, increased use of new digital tools, and additional special activities to help taxpayers in-person. By providing digital forms, making payments easier and continuing work to reduce
paper-based processes that have long hampered the IRS and frustrated taxpayers, our progress is accelerating to make long-overdue improvements.”
Compliance crackdown in progress on high-income tax debtors
In addition to new user-friendly online features, modernised core technology infrastructure, and increased in-person service, especially in underserved and rural communities,
the IRS’s compliance processes have been significantly enhanced, says the agency. This includes what the agency calls “ramped up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes
or failed to pay recognised tax debt.” Focused mostly on taxpayers with more than $1 million in income and more than $250,000 in recognised taxes owed, this new emphasis has, as of April of this year,
collected
$1 billion from high-wealth taxpayers since the program was started.
Werfel says the investment in the IRS is paying off in ways that even those having to pay long-delayed or forgotten tax bills should appreciate
– improving the efficiency of critical tax collection efforts. This in turn delivers more income to the country for elected officials and government agencies and departments to spend
per their priorities.
“We continue working to add staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and
billionaires, pay what is legally owed under federal law,” Werfel said. “At the same time, we are focused on improving our taxpayer service for hard-working taxpayers. The additional resources the IRS received under the Inflation Reduction Act are making a
difference, both for taxpayers who play by the rules and those who don’t.”