Tax Implications of the Inflation Reduction Act

In August 2022, Senate Democrats passed the Inflation Reduction Act, which allocates nearly $80 billion to the International Revenue Service (IRS) and leaves business owners asking: What are the tax implications of this bill? Will there be more audits? How will audits change? In this article, we’ll break down what the Inflation Reduction Act is, where the money is going, the resulting tax implications, what businesses will be targeted, and how IRS audits will change. Let’s dive in.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a climate, health, and tax package passed by Senate Democrats. 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, and
• Taxes on corporations

Will the Inflation Reduction Act Increase IRS Audits?

The Inflation Reduction Act allocates $79.6 billion to the International Revenue Service over the next decade. These funds will increase IRS audits. Let’s take a look at where exactly the money is going. 

Enforcement: IRS is Hiring

According to the 2021 IRS Data Book, IRS in Fiscal Year 2021 had about 79,000 full-time equivalent (FTE) employees, and about 35,000 of them were dedicated to enforcement activity. In 2021, IRS closed about 739,000 tax examinations and processed more than 261 million tax returns and supplemental documents. This number of tax examinations in 2021 was less than half of the number of tax examinations in 2012. So, what does this mean for business owners? IRS is making an effort to conduct more audits than in the past few years and using the additional resources from the Inflation Reduction Act to do so. Let’s take a look at how. With the increased budget resulting from the Inflation Reduction Act, IRS will be expanding its staff. IRS will be hiring additional:

• Revenue agents (to conduct audits)
• Criminal Investigators (to carry out criminal investigations), and
• Revenue officers (to collect taxes)

Operations and Developments

The remaining additional funding will be used for:

• Technology
• Development of a direct free E-file system 
• Operations, and
• Taxpayer services

According to recent estimates from the Congressional Budget Office, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031.

What Sizes of Businesses will be Impacted by the Inflation Reduction Act?

What businesses will be impacted by the Inflation Reduction Act? Let’s discuss.

Large Corporations and the 15% Minimum Corporate Tax

Large corporations with profits over $1 billion will be impacted by the Inflation Reduction Act. The bill imposes a 15% minimum tax on adjusted financial statement income for these corporations. Businesses owned by private equity would be exempt from this tax and the Joint Committee on Taxation projects that the tax would affect approximately 150 corporations. While the current statutory corporate tax rate is 21%, around 200 or more large corporations use tax loopholes to avoid paying that rate and pay below 15%. The bill will target these corporations. This provision would be effective for taxable years beginning after December 31, 2022.

Self-Employed Business Owners Are More Likely to be Audited

Self-employed business owners will be more likely to be audited as a result of this bill. Why? IRS is focused on self-employed people, whose financial situations can become tricky. For example, in these businesses, 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.

Why is IRS Making These Changes?

According to Forbes, “the two primary revenue-raising provisions of the bill are a 15% corporate minimum tax and IRS tax enforcement funding, together estimated to raise over $400 billion.” “In total, the bill will raise over $700 billion in revenue over 10 years, including the aforementioned tax changes, as well as taxes and savings from a prescription drug-pricing proposal.”

How Will Audits Change with a Better-funded IRS?

After the Inflation Reduction Act, audits will not only be more common, but also different. Why? The flux of new hires means the audits will be conducted by revenue agents with less experience. For example, according to IRS, a revenue agent “must be trained on the job for at least two to three years to have the experience and expertise to audit a complex return.”

How Can Businesses Prepare for and Navigate These Changes?

You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you can answer any questions IRS may have. If you are audited, it is important to cooperate with IRS and to provide them with any requested information. 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. For more, read our ultimate guide to IRS audits.

Hire an Experienced Tax Attorney

In the event of an IRS audit, business owners should consider enlisting the help of an experienced tax attorney. A tax attorney can help to guide you through the process of an IRS audit as well as navigate any issues brought on by a less experienced revenue agent.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how the Inflation Reduction Act will impact them. At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits. Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.