The Inflation Reduction Act brings with it many provisions, but one raising public concerns is the approximately $46.5 billion allocated for tax enforcement.
Treasury Secretary Janet Yellen in a letter stated that small businesses or households earning $400,000 annually or less will not see an increase in the chances that they will be audited.
But local experts say in reality small businesses should get their house in order because they may not be completely spared.
“I think there should be some concern or an increased attention to detail in terms of their accounting and tax reporting,” says Alan Goldenberg, a tax principal and leader of the group that handles tax audits at Anchin, an accounting and advisory firm with local offices in Manhattan and Uniondale.
He said, for example, that operating partnerships like boutique law firms or accounting firms, which don’t necessarily have to be large businesses, can easily make $400,000 in net income in New York.
He said a sudden surge in enforcement won’t happen overnight because the money’s allocated over 10 years.
And while the Treasury has given the IRS six months to provide a detailed plan, small businesses should get their financials in order, Goldenberg said.
Closing revenue gap
The Inflation Reduction Act’s funding is meant to close the estimated $600 billion revenue gap from uncollected taxes and go after the wealthy and large corporations.
The Treasury Department in a statement said: “A large percentage of the resources to modernize the IRS will be used to improve taxpayer services – from answering the phones to improving IT systems – and to crack down on high-income and corporate tax evaders…”
Still, Ed McWilliams, a partner at Bohemia-based Cerini & Associates, a CPA and business advisory firm, says, “I think the rising tide lifts all ships.”
IRS officials have said they want to return to historical levels of enforcement, he explains.
With that said, “you’re going to see small businesses probably have an audit increase, but only back to levels they once were,” McWilliams says.
He said the norm they likely want to return to is 2010/2011 levels of enforcement, which isn’t terribly bad news.
Few get audited
For people making less than $500,000 in 2011, about 0.86% of individual returns faced audit/examination compared with 0.45% in 2017 (the last tax year for which most audits would be completed and past the IRS statute of limitations), McWilliams says. For partnerships and S-corps making less than $500,000, roughly 0.5% of returns faced audit/examination in 2011 versus roughly 0.10% in 2017, he says.
The IRS’ budget hasn’t changed in about a decade and in the meantime they’ve seen a decline in staff due to attrition, he says.
For example, according to IRS data, in Fiscal Year 2021, there were 8,536 revenue agents. Ten years earlier, there were 13,761 agents.
But not all funding will go to hire agents strictly for enforcement, McWilliams says.
The Treasury Department in a statement noted: “The long-term resources in the Inflation Reduction Act will not only help replace 50,000 employees who are soon to retire, but also modernize the agency with improved service and technology, and enforcement resources to pursue high-end evasion.”
Make sure numbers add up
Still, McWilliams said businesses should be making sure they’re keeping good records and substantiating expenses properly.
Another area to pay attention to is complying with the employer mandate provisions of the Affordable Care Act, says Joanna Kim- Brunetti, executive vice president of regulatory affairs at Los Angeles-based Trusaic, a software and services company offering ACA compliance services.
Under the mandate, employers with 50 or more full-time and full-time equivalent employees must offer minimum essential coverage to at least 95% of their full-time workforce. It also sets a minimum baseline of coverage and affordability, which changes each year. If these thresholds aren’t met, an employer faces penalties, she says.
Employers can be subject to penalties if at least one full-time employee receives a federal premium tax credit (PTC) on a Health Insurance Marketplace, Kim-Brunetti says. This credit’s available to people without another offer of affordable coverage.
The Inflation Reduction Act extends premium tax credit subsidies for health insurance until 2025. So even one employee taking a PTC could automatically trigger ACA non-compliance with the IRS, Kim-Brunetti says.
Applicable employers should be reviewing their coverage offerings to make sure they meet affordability thresholds, she says. For more, see https://tinyurl.com/3jd3avkx
Treasury Secretary Janet Yellen, in a letter to IRS Commissioner Charles Rettig, showed her support for increased IRS funding, noting at current funding levels “the IRS has resources to initiate just 7,500 audits annually out of more than 4 million returns received.”