On Sunday, August 7th of 2022, the Senate passed the Budget Reconciliation Bill, or the Inflation Reduction Act, which includes nearly $80 billion in funding for IRS. More than half of the funding is set for enforcement. IRS aims to collect more from corporate and high-net-worth tax dodgers.
What will all this mean for taxpayers?The founder of Milikowsky Tax Law, John Milikowsky, explains the impact from the Budget Reconciliation Bill in detail. Check out the video below for more information:
Read on for an in-depth discussion of the Inflation Reduction Act and its effects.
In this article, we will discuss:
- The Inflation Reduction Act: what it is and what the money will be used for
- How these changes will affect audits
- Red flags IRS will look for to initiate audits
- How business owners can prepare for the increased IRS scrutiny of their tax returns
- Any additional taxes the bill will impose
What is the Budget Reconciliation Bill?In August of 2022, Senate Democrats passed the Inflation Reduction Act, a climate, health and tax package. The bill passed with all 50 Democratic votes in the Senate. The final version of the act proposes policy changes such as:
- Climate and energy provisions
- Prescription drug price reforms
- Taxes on corporations
The Budget Reconciliation Bill and IRSPerhaps one of the most controversial pieces of the act is the expansion of the International Revenue Service. This expansion passed on the claim that strengthening enforcement of existing taxes will raise revenue without having to create new laws. The Inflation Reduction Act allocates $79.6 billion to IRS over the next decade. Where is this money going?
EnforcementMore than half of the nearly $80 billion is meant for enforcement. IRS aims to collect more from corporate and high-net-worth individuals who have been successful dodging taxes in the past. Why the focus on these taxpayers? IRS’s audit rates have dropped. In fact, in 2010, it was 16% for high earners but has declined to only 2%. To combat this drop, IRS will be hiring more revenue agents to do audits, more criminal investigators to do criminal investigation of crimes, and more revenue officers to collect the tax.
Operations and DevelopmentsThe remainder of the funding is set aside for:
- Taxpayer services
- Development of a direct free e-file system
- And more
What Do These Changes Mean for Taxpayers?This bill will lead to an increase in the number of audits conducted each year by IRS, therefore increasing the chance that your business will be audited. However, there are steps you can take to prepare. First, let’s discuss which taxpayers are at the highest risk of being audited:
- High-earners or high-income taxpayers
- Self-employed business owners