Yellen Directs I.R.S. to Embark on $80 Billion Overhaul Plan

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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 L. 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 I.R.S. commissioner, Charles P. Rettig, Ms. 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 I.R.S. 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,” Ms. 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agents, expand depleted taxpayer-services teams (which leave most customer service calls unanswered) and upgrade outdated technology systems.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.

Ms. Yellen directed the agency to draft the plans within six months, and she tapped her deputy, Wally Adeyemo, to work with Mr. 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.

What’s in the Inflation Reduction Act

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What’s in the Inflation Reduction Act

A substantive legislation. The $370 billion climate, tax and health care package that President Biden signed on Aug. 16 could have far-reaching effects on the environment and the economy. Here are some of the key provisions:

What’s in the Inflation Reduction Act

Auto industry. Until now, taxpayers could get up to $7,500 in tax credits for purchasing an electric vehicle, but there was a cap on how many cars from each manufacturer were eligible. The new law will eliminate this cap and extend the tax credit until 2032; used cars will also qualify for a credit of up to $4,000.

What’s in the Inflation Reduction Act

Energy industry. The legislation will provide billions of dollars in rebates for Americans who buy energy efficient and electric appliances. Companies will get tax credits for building new sources of emissions-free electricity. The package also includes $60 billion set aside to encourage clean energy manufacturing and penalties for methane emissions that exceed federal limits starting in 2024.

What’s in the Inflation Reduction Act

Health care. For the first time, Medicare will be allowed to negotiate with drugmakers on the price of some prescription medicines. The law also extends subsidies available under the Affordable Care Act, which were set to expire at the end of the year, for an additional three years.

What’s in the Inflation Reduction Act

Tax code. The law introduces a new 15 percent corporate minimum tax on the profits companies report to shareholders, applying to companies that report more than $1 billion in annual income but are able to use credits, deductions and other tax treatments to lower their effective tax rates. The legislation will bolster the I.R.S. with an investment of about $80 billion.

What’s in the Inflation Reduction Act

Low-income communities. The package includes over $60 billion in support of low-income communities and communities of color that are disproportionately burdened by climate change. Among the provisions are grants for zero-emissions technology and money to mitigate the negative effects of highways and other transportation facilities.

What’s in the Inflation Reduction Act

Fossil fuels industry. The legislation requires the federal government to auction off more public space for oil drilling and expand tax credits for coal and gas-burning plants that rely on carbon capture technology. These provisions are among those that were added to gain the support of Senator Joe Manchin III, Democrat of West Virginia.

What’s in the Inflation Reduction Act

West Virginia. The law is expected to bring big benefits to Mr. Manchin’s state, the nation’s second-largest producer of coal, making permanent a federal trust fund to support miners with black lung disease and offering new incentives to build wind and solar farms in areas where coal mines or coal plants have recently closed.

More funding for the I.R.S. 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.

In her memo, Ms. Yellen reiterated that a bolstered I.R.S. 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,” Ms. Yellen wrote. “Instead, they will allow the I.R.S. 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 I.R.S. has struggled for years amid budget cuts engineered by Republicans, who have accused the agency of targeting conservative groups. Since Mr. 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 I.R.S. Mr. Adeyemo and Mr. Rettig recently held a two-day planning meeting to devise a strategy for the I.R.S. in the event that the money was approved, and contingency plans if it were not.

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

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

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