by Stephen Reed | Accounting News, Audit and Accounting, IRS, News, Newsletter, Small Business
The Internal Revenue Service (IRS) has recently announced a significant increase in the number of audits it plans to conduct in the coming years. This development is part of a broader initiative aimed at improving tax compliance and closing the tax gap, which is the difference between taxes owed and taxes paid on time. As a taxpayer, understanding who the IRS plans to target with these audits is important. Here’s what you need to know.
The Inflation Reduction Act
The Inflation Reduction Act (IRA), which was signed into law in 2022 by President Biden, granted the IRS $80 billion in new funding. The goal of the funding is to bolster an agency known for lengthy processing delays, a drop-off in audit rates, and major customer service shortcomings.
Over the next three tax years, the IRS plans a sharp increase in audits, but the agency insists these audits won’t affect taxpayers who earn less than $400,000 annually.
Focus on High-Income Earners
The IRS plans to focus on individuals earning $400,000 or more annually. This demographic has historically been associated with more complex tax returns, which can include multiple income streams, investments, and deductions. The IRS’s goal in focusing on high-income earners is to ensure that these taxpayers are accurately reporting their income and paying the correct amount of taxes.
Large Corporations
The IRS plans to triple the audit rates on large corporations with assets totaling more than $250 million. By tax year 2026, audit rates for these companies will rise to 22.6%, up from 8.8% in 2019. Additionally, large partnerships with assets totaling more than $10 million will be subject to significant audit rate increases, rising to 1% in tax year 2026 from 0.1% in 2019.
Small Businesses Potentially Under the Microscope
Despite initially assuring small business owners that the increase in audits won’t affect small businesses, some evidence is signifying otherwise. The Government Accountability Office, a nonpartisan agency, reported that more than 90% of audits are on families and small businesses below the $400,000 income threshold. In March, when Treasury Secretary Janet Yellen was asked by the House Ways and Means Committee about the number of new audits funded by the Inflation Reduction Act, she confirmed that the proportion of new audits targeting those families and small businesses would remain at the historical level of 90%.
Cryptocurrency Transactions
With the rise of digital currencies, the IRS is increasing its efforts to audit taxpayers involved in cryptocurrency transactions. This includes gains from the sale of cryptocurrencies, mining activities, and even receiving cryptocurrencies as payment for goods or services. If investors do not comply with reporting requirements, the IRS could impose accuracy penalties. Therefore, investors should maintain detailed records of all cryptocurrency transactions.
Offshore Accounts
Taxpayers with offshore accounts and foreign assets are also on the IRS’s radar. The Agency has long focused on foreign income and assets due to the potential for significant tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with foreign financial assets exceeding certain thresholds to report these assets to the IRS. Failure to comply with these reporting requirements can result in substantial penalties. The boost in funding will allow the IRS to continue an aggressive pursuit of individuals and businesses attempting to hide income and assets overseas.
Preparing for a Possible Audit
Given the IRS’s focus on these areas, taxpayers need to ensure their tax returns are accurate and comply with all applicable laws. Keeping thorough records and documentation can help in the event of an audit. Consulting with qualified tax professionals can also provide guidance and help mitigate the risk of errors on your tax return.
by Jean Miller | Accounting News, IRS, News
The IRS has released a plan for the nearly $80 billion in funding enacted through the Inflation Reduction Act. The plan includes improvements to customer service, technology, and enforcement. In this article we will explore how the funding plan will affect taxpayers.
Boost Technology
The plan aims to help the IRS develop new technologies to make the tax filing process easier for taxpayers, such as tools to help identify errors before filing returns. These improvements could make it easier for taxpayers to comply with tax laws and reduce the likelihood of mistakes in filing their returns. Additionally, the IRS seeks to phase out its paper backlog within five years by moving to a fully digital correspondence process.
Focus on Customer Service
The IRS intends to hire more than 7,000 service representatives and 1,500 auditors with the aim of reducing wait times and being more accessible to taxpayers, leading to a more efficient and responsive system. Within the next five years, taxpayers should be able to file documents and respond to notices online as well as download their account information.
Lean In to Enforcement Efforts
The agency wants to crack down on tax evasion, and plans to utilize a portion of the funding to do so. This could mean an increase in audits. Taxpayers who may have cut corners in the past could face stricter penalties for non-compliance. However, increased enforcement could also lead to more compliance with tax laws, if there is a clearer standard of behavior and more deterrents for those who attempt to cheat the system.
Close the Tax Gap
The IRS plans to reduce the budget deficit by closing the tax gap, initially focusing on tax returns for large corporations, complex partnerships, and wealthy families. The boost in staffing will help to address these more complicated audits. The agency has been quick to point out that households making less than $400,000 will not be affected by an increase in audit rates.
by Daniel Kittell | Accounting News, IRS, News, Tax, Tax Planning - Individual
On August 16, 2022, President Biden signed into law the Inflation Reduction Act. It’s a wide-sweeping bill that addresses climate, health care, and some mix of tax breaks and tax hikes, as well as additional funding for the IRS. Below you’ll find a summary of how the Inflation Reduction Act could affect you.
Health Care
Funding for the Affordable Care Act (ACA) was due to expire at the end of 2022, but the Inflation Reduction Act extends funding through 2025. This will allow eligible individuals to continue to purchase insurance with lower premiums through the federal Health Insurance Marketplace.
The Inflation Reduction Act also extends the temporary exception from the American Rescue Plan Act (ARPA) that allows taxpayers with incomes above 400 percent of the Federal Poverty Level to qualify for the Premium Tax Credit (PTC). The PTC makes health insurance more affordable by helping eligible consumers pay premiums for coverage purchased through the Health Insurance Marketplace. To get this credit, you can claim the PTC on your tax return, or you can choose to have amounts paid directly to the insurance provider as long as you qualify for advance payments of the premium tax credit.
Energy Efficient Home Improvement Credit
Previously known as the Nonbusiness Energy Property Credit, the renamed Energy Efficient Home Improvement credit was extended through 2032. Beginning next year, the credit will be equal to 30 percent of the costs of all qualified home improvements made during the year. Furthermore:
- A $1,200 annual limit on the total credit amount will replace the current $500 lifetime limit.
- Annual limits for particular types of qualifying home improvements will be as follows:
- $150 for home energy audits;
- $250 for any exterior door ($500 total for all exterior doors) that satisfy appropriate Energy Star requirements;
- $600 for exterior windows and skylights that meet Energy Star most efficient certification requirements;
- $600 for other eligible energy property, including central air conditioners; electric panels and various similar equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers;
- $2,000 for heat pump and heat pump water heaters; biomass stoves and boilers. This group of upgrades is not restricted by the $1,200 annual limit on total credits or the $600 limit on qualified energy property; and
- Roofing and air circulating fans will no longer be eligible for the credit.
So, if you stretch your qualifying home projects over a few years, you can claim the maximum credit each year.
Electric Vehicle Tax Credits
The Inflation Reduction Act extends the Clean Vehicle Credit for ten years — until December 2032 — and creates new credits for previously-owned clean vehicles and qualified commercial clean vehicles. Taxpayers can qualify for a credit of up to $7,500 for a new electric car or $4,000 for a used one. However, in order to qualify for the tax credit, electric vehicles must be assembled in North America, and the Biden administration has already prepared a list of 20 EVs that qualify.
IRS Funding
The Inflation Reduction Act also includes about $80 billion of additional funding over ten years for the IRS. The exact plans for those funds aren’t clear yet, but we know that $25 billion is intended to improve IRS operations. Additionally, law makers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This could include expanding staff and modernizing outdated processing systems.
