LOOKING DOWN THE LINE: Werfel and other top IRS officials also are trying to make the case that sustained long-term funding for the agency is needed to continue the improvements, while preaching patience to both taxpayers and lawmakers as the service undergoes a thorough overhaul. “We’re still on a day-to-day basis going to run into logistical issues, system issues, quirks in the infrastructure, that if we were on a modern, resilient platform, we wouldn’t run into,” Werfel said. “We can’t boil the ocean. We have to move thoughtfully, smartly, and incrementally.” As it stands, the IRS projects it will run out of IRA funding for modernizing its business systems and improving its taxpayer services pretty soon — by fiscal year 2026. With that hanging over the IRS’s head, Werfel told Morning Tax that the Republicans who want to pull back on that enhanced IRA funding at least acknowledge that the agency is making life easier for taxpayers. “Skeptics on the Hill understand that while service gaps remain, it’s hard to argue that we really [haven’t] made dramatic progress in reversing the service trends that existed before the Inflation Reduction Act,” he said. “We hear time and time again that less people are calling their congressional offices for tax help,” Werfel added. Still, Republicans have not previously tried to repeal the IRA funding for taxpayer services and business modernization, even as they won an agreement to claw back $20 billion of IRS funding from the law. So the more pressing funding debate for the IRS is almost certainly over the increased funding for items like enforcement, something that Republicans have made a prime target since almost the moment Democrats authorized that money back in 2022. The Biden administration and the IRS have said from the beginning that it would take a while to ramp up the agency’s efforts to generate more revenue out of increased tax compliance from the rich. But it’s not hard to notice that the returns from those investments in enforcement haven’t been overwhelming yet, as Pro Tax’s Brian Faler noted last week. Meanwhile, progressive advocates who support the higher IRS funding are gearing up for what could be a full frontal attack from Republicans on those enforcement dollars next year. “The tide is shifting, and efforts to hold the ultra-wealthy and corporations accountable are paying off,” Lindsay Owens of Groundwork Collaborative said after the IRS announced it had collected a new $1.3 billion in overdue taxes from the rich. A couple more odds and ends from Austin: —Morning Tax also asked Werfel about a recent watchdog report, in which the IRS lamented that it was having challenges recruiting top talent from the private sector to audit some of the most complex tax returns involving multinational companies. The commissioner said that the IRS had in fact made substantial strides in hiring lawyers in the IRS chief counsel’s office and crypto-tax experts. The specialized lawyers and accountants who come to the IRS tend to cite a desire to give back after a lucrative career in the private sector. “I wish more people across these specialized areas of accounting, law, etc., kind of felt that burn inside them, but a lot do,” he said. —And if we haven’t been clear enough, the IRS still has a ways to go on paper processing. IRS employees still manually open letters containing returns, use stamps to assign returns and other documents with document-locator numbers, and transcribe paper returns into the agency’s database one digit at a time. The new scanning machines purchased through the IRA would automate most of that process, although employees would still need to check that taxpayers didn’t make errors on their returns. And while the IRS has made significant progress digitally scanning some forms, including certain employment tax returns, it still has to figure out how to scrape the data from more complex documents, like individual and partnership returns. The agency is also working on tools to transmit that digital information into the agency’s Master File, which is the database at the agency that stores every taxpayer's submission. LET’S TALK INTERNATIONAL: Yellen also gave reporters a brief update on negotiations over the global tax framework on the digital economy. Countries had hoped to polish off the framework by the end of June, before again seeing a deadline slip. This time, an impasse between the U.S. and other countries, most notably India, over rules that dictate how subsidiaries of multinationals transfer funds between one another drove the gridlock. Further complicating the matter is that Canada decided to forge ahead on its own digital tax, which is set to significantly impact Big Tech companies like Google and Apple. “This issue that you referred to, though, about transfer pricing is an important one,” Yellen told Morning Tax. “It’s especially important to American firms, and we consider finding a successful resolution essential to being able to convince Congress and the American public that this is in their best interest.” Yellen added, on the transfer pricing issue, “there are some hold-outs.” She also noted that the USTR had recently challenged Canada’s digital services tax as a violation of the U.S.-Mexico-Canada Agreement: “Canada went ahead and adopted a digital tax. We’ve opened up discussions with them in the context of the dispute settlement mechanism of the U.S.-Canada-Mexico free trade agreement,” Yellen said.
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