How Will New IRS Hirings Impact Your Business?

The new Inflation Reduction Act approves funding for the Internal Revenue Service (IRS), including an allocated amount to hire new staff. The agency is expected to hire thousands of additional agents to carry out its purpose of providing taxpayers with top-quality service and helping them meet their tax obligations. But what do these new hires mean for your business?

Why Did They Increase the Funding for the IRS?

Since 2010, the IRS budget has been cut by nearly 20 percent and the agency has lost over 16,000 employees. Plus, at least 50,000 of the agency’s current employees will be retiring within the next 5 years. Since the agency has been so understaffed, much of the $80 billion in funds that the Inflation Reduction Act provides for the IRS over the course of the next ten years will be going towards hiring new employees.

These new employees will not only consist of enforcement staff but also other types of staff such as customer service. According to the Treasury Department, in the first half of 2021, there were fewer than 15,000 employees available to answer more than 200 million calls. This means people who had questions about filing their taxes or ran into tax problems had trouble getting the service they needed.

The budget cuts and fewer employees have also led to a backlog of more than 9.7 million unprocessed 2021 tax returns. The Treasury Department hopes the new funding will help to prevent that backlog in coming years as well as help update their technology. Currently, some of the IRS’s computer systems still run on a 1960s programming language.

Who Will Be Audited?

These updates will help the IRS run more smoothly and hopefully reduce the “tax gap.” (That’s the total difference between what people owe in taxes and how much they actually pay, about $600 billion/year.) However, many people are concerned with what the increased workforce means for IRS audits.

The plan is that this new funding will allow the IRS to upgrade their technology to better target wealthy earners who are not paying their fair share of taxes. Right now, audit rates for the wealthiest individual taxpayers and large corporations have been declining because of a lack of staff. Instead, staff have been targeting low-income individuals because those cases are typically less complex and take less time.

The Treasury Department states that low and middle-income earners as well as small businesses will not see increased audits due to this new bill and that their focus will be on training more employees so they can shift veteran staff to handle more high-income cases over time. Despite these reassurances, it is likely that some small businesses as well as self-employed individuals will have increased chances of being audited as the agency’s enforcement abilities expand.

Red Flags for Audits & What To Do For Prevention

Audits are triggered when the IRS’s software system flags a tax return. This happens most often when the deductions or credits fall far outside of the income. For example, if one-third of your income is written off as a ‘charitable deduction,’ you’re more likely to be audited. This could affect small businesses, self-employed workers, or partnerships, especially cash-based businesses, because it’s often easier for them to claim deductions they don’t qualify for or to underreport income.

It’s also more challenging to determine accuracy when an individual’s income is not reported independently using a W-2. Even if you’re not trying to ‘outsmart’ the system, you could be subject to an audit if your numbers don’t make sense to the IRS software. Here are some red flags that could increase your chance of getting audited:

• Reported income doesn’t match W-2s
• Self-employed worker claiming the earned income tax credit
• Home office deductions — especially if it’s a large area
• Auto deductions
• Rounded numbers

As a business owner, you have a right to auto and home office deductions if they’re reasonable, but you should definitely have solid tax-preparation help in the coming years to ensure you file correctly. Also, it’s always a good idea to keep sound records and save receipts in case you are subject to an audit.

As a full-service CPA, Paul Anderson has years of experience with tax preparation as well as accounting and bookkeeping. He keeps up to date with year-to-year changes in tax codes and always provides personalized tax prep specific to your business. Contact Paul at SD Bookkeeping Solutions to learn more about how he can help you.