Surprisingly 79 percent of taxpayers surveyed were either “very” or “somewhat” satisfied in their personal interactions with the IRS.

Earlier this year, the IRS released its annual Data Book, a compendium of statistics from the agency offering a snapshot of its functions and activities during the most recently completed fiscal year (October 1, 2021, through September 30, 2022). Let’s look back and examine the several key areas the Data Book focused on:

• The IRS’ continued response to the COVID-19 pandemic;
• Returns filed, taxes collected and refunds issued;
• Service to taxpayers;
• Compliance activities;
• Collection activities; and
• IRS budget and workforce.

Return Processing

Largely as a result of the reduction in economic impact payments issued in 2021, refunds issued were down from $1.138 trillion in 2021 to $642 billion in 2022 (a decrease of approximately 56 percent). However, gross collections were up, from $4.112 trillion in 2021 to $4.902 trillion in 2022 (19 percent), resulting in an increase in net collections (e.g., taxes) from $2.974 trillion to $4.260 trillion (43 percent).

The biggest gains in net collections came from individual, trust and estate income taxes ($1.094 trillion, an increase of 46 percent) and business income taxes, where net increases went up about $5.43 billion, an increase of 15 percent.

In terms of returns filed, there was an overall decrease in all tax filings by 2.3 percent as compared to tax year 2021. The most significant decrease in types of returns related to the filing of certain international and nonresident forms, such as 1040-NR, 1040-PR and 1040-SS, which decreased 8.6 percent in 2022. This decrease is the likely result of the past and continuing success of the IRS’ enforcement actions on international taxpayers and U.S.-based taxpayers with international activity. Conversely, the number of C corporation and S corporation filings increased by approximately 10 percent as compared to tax year 2021. This increase is the likely result of new businesses opening post pandemic.

Service to Taxpayers

Surprisingly 79 percent of taxpayers surveyed were either “very” or “somewhat” satisfied in their personal interactions with the IRS. This is up 4 percent from the prior year and perhaps represents an unusual sample of taxpayers who are actually able to get a hold of a live employee. In 2022, the percentage of callers who were able to receive live assistance from the IRS held steady at to 21.3 percent, and average hold times increased from 22.8 minutes to 28.6 minutes. This mirrors our own experiences as of late, where many IRS phone lines often do not even give you the option to wait and just terminate the call automatically.

While the IRS highlights the nearly 1.1 billion visits to IRS.gov and 447.7 million inquiries on “Where’s My Refund,” these statistics are likely due to taxpayers’ continued desperation to find assistance anywhere, rather than just an overwhelming preference for online help.

Compliance Efforts

Overall, new compliance activity at the IRS increased in 2022. For tax year 2022, less than 0.20 percent of all returns were audited, up from 0.18 percent for tax year 2021. As high-income individuals and businesses remain a disproportionate focus of examiners, audit rates have modestly increased for the most recent tax year from 0.42 percent to 0.44 percent for individuals with total positive income of $500,000 or more, but decreased from 23.9 percent in tax year 2021 to 17.7 percent in tax year 2022 for C corporations with balance sheet assets of $20 billion or more.

Collection Activities

IRS collection activity in 2022 increased from 2021 and 2020. In 2022, the IRS increased their collections on unpaid balances due with tax returns and assessed more in additional taxes for late-filed returns.

Total civil penalties assessed followed a similar trend, with $73.6 billion being assessed in 2022, up from $37.3 billion in 2021 and $31.4 billion in 2020.

IRS Operations

IRS expenditures increased from $13.7 billion in 2021 to $14.3 billion in 2022, an increase of 4 percent, with taxpayer services and enforcement seeing most of these increases as the IRS strives to modernize and improve taxpayer service and experiences and improve internal efficiency while increasing collection of taxes.

Staffing also increased in 2022, with 79,070 full-time equivalent positions, as compared to 78,661 in 2021 and 75,773 in 2020.

TAG’s Perspective

IRS’ fiscal year 2022 saw an increased catch-up of backlog returns, payments and letters being processed and addressed from delays caused by the pandemic. We expect IRS operations to shift focus from catch-up processing to enforcement efforts, especially in light of the new compliance efforts set forth by the IRS in both 2021 and 2023. On September 8, 2023, the IRS announced plans to roll out new audit initiatives targeting America’s wealthiest taxpayers including high-income and high-wealth individuals, partnerships and large corporations as well as abusive tax shelters pushed by promoters stretching the limits of legality.

This initiative is designed to increase scrutiny and ultimately increase attention and audit activity on these taxpayers who over the past decade saw sharp drops in audit rates during the past decade (despite the modest reported increase between 2022 and 2021). The scrutiny will be driven with the aid of increased technology and the use of artificial intelligence to help IRS compliance teams to better detect those taxpayers to be audited.

The key focus of this effort will include:

1. Taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. The IRS plans to have dozens of revenue officers focusing on the collection of these tax debts.
2. The opening of 75 examinations of the largest partnerships in the U.S. that represent a cross section of industries that include hedge funds, real estate investment partnerships, publicly traded partnerships and law firms, including large partnership returns with ongoing discrepancies on balance sheets, which is an indicator of noncompliance.
3. The launch of numerous compliance efforts focusing on abusive microcaptive insurance arrangements, syndicated conservation easement abuses as well as expanding efforts involving digital assets and Foreign Bank and Financial Accounts reporting violations.

In furtherance of IRS drumming, on September 20, 2023, the IRS announced plans to establish a new special enforcement team to focus on large or complex pass-through entities. The new unit will be a part of the IRS Large Business and International Division and staffed, in part, by new people joining the IRS under the new agency hiring initiative of more than 3,700 positions being added nationwide. Targeting high-income individuals remains a high priority for IRS.

For More Information

If you would like more information about this topic or your own unique situation, please contact Mary Beth Lee, Michael A. Gillen or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.