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
Let’s dive in.
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
However, despite its name, studies show the bill will have little to no impact on inflation. Forbes deems this act a “slimmed down version of the Build Back Better Bill.” Find a detailed explanation of the Build Back Better bill,here. Taxpayers should note that this bill has not yet passed in the House of Representatives.
The Budget Reconciliation Bill and IRS
Perhaps 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?
Enforcement
More 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.
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
Non-filers
Self-employed business owners
Let’s take a closer look at each of these.
High-Earners or High Income Taxpayers
A high-income taxpayer, or high-earner, is defined by IRS as someone who generally receives income in excess of $100,000 during a tax year. However, we typically see audits for high-earners of $200,000, $250,000, or higher.According to Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division at IRS, “The IRS is committed to fairness in the tax system, and we want to remind people across all income categories that they need to file their taxes…These visits focusing on high-income taxpayers will be taking place across the country.”
Non-filers
While non-filers can be considered someone who did not file taxes for a single year, usually we are looking at a taxpayer who has skipped at least a couple years or more. At Milikowsky Tax Law, we have some clients who haven’t filed tax returns for five, six, seven years, a significant amount of time.
Self-Employed Business Owners
IRS is focused on self-employed people, whose financial situations can become tricky. For example, there are no W-2 jobs with a paycheck; there is just money coming in and going out. This increase in audits means that self-employed people will have to be even more careful in filing the proper forms and providing the correct taxable income (but more on this later).
How Business Owners Can Prepare for an IRS Audit
IRS is primarily focused on high earners who do not file tax returns or have not filed for a number of years. If you are a high-earner or you have not been filing your taxes, you are at a higher risk for an audit.You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you are able to answer any questions the IRS may have. If you are audited, it is important to cooperate with the IRS and to provide them with any information they request.If you are self-employed, we encourage you to keep track of income and expenses so you can file a tax return. Consider taking a look at bank and credit card statements for an idea of business expenses. Read our ultimate guide to IRS audits, here.
Additional Taxes the Budget Reconciliation Bill will Impose
15% Minimum Corporate Tax
While the 15% minimum corporate tax mostly applies to corporations that have over $1 billion of income, it can still complicate things for other business owners; The AICPA has sent letters to Congress indicating this could result in some confusion and inconsistent results. Why? Because the 15% corporate minimum tax applies on book income, not tax return income, which are two different things. Book income is based on your books and records, such as the figures on your profit and loss statement. This can differ significantly from what is reported on your tax return. The two different figures could produce inconsistent results.
One Percent Excise Tax on Stock Redemption
This bill potentially could assess a one percent excise tax on the stock redemption. This tax on stock redemption may also apply if a corporation buys back its own stock.Find a one-page summary of the Inflation Reduction Act of 2022,here.
Still Have Questions?
Business owners shouldcontact Milikowsky Tax Lawif they have any additional questions about how this bill will impact them.We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.Read on to learn how to respond to an IRS audit in 2022, here.
https://www.caltaxadviser.com/wp-content/uploads/2022/12/iStock-1317087986.jpg12992309Amanda Rogershttps://www.caltaxadviser.com/wp-content/uploads/MTL-Square-red-logo.pngAmanda Rogers2022-10-05 13:37:002022-12-14 15:24:11IRS Audits and the Impact from the Budget Reconciliation Bill Explained
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