The tax man is receiving a whopping $80 billion thanks to the Inflation Reduction Act recently passed by the Biden administration. Some people are losing it.
“It’s a middle finger to the American public,” He says Florida Governor Ron DeSantis. Small businesses will be the first to suffer, Joe Hinchman, executive vice president of the National Taxpayers Union Foundation, told the New York Post. “Yours [Internal Revenue Service] it will have to target small and medium-sized businesses because they are not going to fight back,” he said. “We’ve seen this before…the IRS says, ‘We’re going after the rich,’ but when you’re trying to raise that much money, the rich can only go so far.”
The IRS and the Biden administration naturally say small businesses shouldn’t worry.
“These resources have nothing to do with increasing audit scrutiny of small businesses or middle-income Americans,” IRS Commissioner Charles Retting said. wrote in a letter to legislators. There will be “a lower probability of auditing due to improved technology and customer service”, He says Treasury Secretary Janet Yellen.
Who to believe? Will your small business face increased scrutiny from the IRS? Will your tax bill increase as a result? The answer to both questions: don’t panic.
True, the IRS will use some of the $80 billion in funding to hire some 87,000 new agents. But 50,000 IRS employees expected retire or otherwise go the agency in the next five years. Many of those employees will replace current ones. It’s true that the IRS currently has about 74,000 employees, so even adding 37,000 net new employees is a huge jump.
The rest of the funding, which will come over the next 10 years, by the way, will go toward updating the agency’s woefully outdated systems. These are the systems behind refund delivery delays and currently throwing up countless incorrect notices causing countless hours of wasted time by business owners and their accountants trying to respond.
More agents. Better systems. Yes, there will be more audits. And many small businesses will be affected. But again, don’t panic. Just look at the history compliance data from the IRS.
single 2.9% of corporate returns were audited in 2019. But these are not really small businesses. If you are a small business owner, it is very likely that you file some type of transfer tax return, such as a partnership or S corporation. In 2019, 9,093,343 such returns were filed and 5,283 of them were audited. No, I’m not missing any zero. That’s less than 0.1% of all small business tax returns. Audit fees for individuals between $50,000 and $500,000 are also around 0.1%. That’s a tenth of 1%.
Let’s say the number of small businesses audited triples in the next 10 years. Using the numbers above, we would see a “massive” 15,849 companies under scrutiny. Meanwhile, 9,077,494 will remain untouched. There are better odds of winning Las Vegas roulette than being chosen for an audit.
Yes, I understand that even if your books are spotlessly clean, just responding to a simple notice from the IRS can wreak havoc and waste time. I know that most business owners report their income honestly. I am aware that dealing with the government is painful and that nobody likes to pay their taxes.
But there’s also something that many of us don’t like to admit: audits are actually a good thing. They keep some taxpayers honest for fear of being caught. They are a necessary evil to ensure that taxes are collected by those who owe them. In fiscal year 2021 alone, the IRS closed 738,959 tax return exams, resulting in almost $26.8 billion in additional recommended taxes Without audits, who is going to make up that shortfall? You and me, that’s who.
Another thing: most experts I do not see an increase in audits until at least 2026, so we have a few years to prepare. And there are plenty of things a small business can do to avoid being flagged. Simple things.
Pay your estimated taxes on time. Respond to requests promptly. File your returns when they are due. Make sure things add up correctly and link them to documentation (such as W-2s and 1099s) that are reported separately. Don’t pay yourself too little. Don’t pay yourself too much. Don’t take excessive deductions. Don’t make too much money in one year and don’t lose too much money over several years. If so, at least have very, very good explanations… and documentation.
As an accountant and business owner, it may surprise you that I am in favor of the $80 billion going to the IRS. Why? Because the more this agency can do to improve its efficiency, the faster we can get answers to our questions. And the more the agency can leverage technology to do their hard work, the more likely I am to deal less with them and more with my clients. Let them audit. We are ready.