Get ready, taxpayers: The IRS is planning to make good on its promises for a major overhaul.
The Inflation Reduction Act Strategic Operating Plan, released April 5, 2023, lays out the details of what to expect from the IRS. It plans to step up two major actions: audits of individuals and businesses with incomes of $400,000 and above, and new and improved customer service for all.
The IRS Has $80 Billion to Spend
The 2022 Inflation Reduction Act awarded approximately $80 billion to the IRS, which the agency will spend over the next decade. The IRS and U.S. Department of the Treasury have determined that money will be divided to fund five specific objectives:
1. Improve services to help taxpayers meet their obligations and receive the tax incentives for which they are eligible.
2. Quickly resolve taxpayer issues.
3. Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.
4. Deliver cutting-edge technology, data and analytics to operate more effectively.
5. Attract, retain and empower a highly skilled, diverse workforce and develop a culture that is better equipped to deliver results for taxpayers.
[Read: 10 Tax Credits You May Qualify for This Year]
These investments are long overdue. The IRS has been significantly underfunded, with a 22% budget reduction in real terms from 2010 to 2021. The result has been outdated technology and an eroded workforce that hasn’t been able to keep up with the agency’s demands.
And that’s all set to change.
Potential Audits for Wealthy (And Not So Wealthy) Taxpayers
As per the IRS plan, households and businesses earning $400,000 or less won’t see an uptick on audit rates relative to historical levels. The objective is to identify noncompliant activity and fraud, then quickly address it.
With budgetary shortfalls, the IRS has struggled to enforce and close the tax gap attributable to high-income and wealthy taxpayers. In 2019, people earning $1 million or more were subject to an audit rate of just 0.7%, while in 2011 it was 7.2%.
As outlined in the plan, the IRS will:
— Increase compliance coverage in areas with complex issues and complex returns.
— Improve enforcement and risk identification through better use of data analytics, technology and centralized operations.
— Increase the expertise and capacity necessary to examine highly complex returns and issues more effectively.
That doesn’t mean that if you fall under the threshold you are protected from an audit, especially if you have your own business, Romeo Razi, certified public accountant and former IRS auditor, says.
“They say they will be focusing on the one-percenters; however, people who make over $400,000 tend to be pretty sophisticated,” Razi says. “The auditors will be new, so they will probably first focus on more simple cases. It will be easier to find areas to make adjustments.”
The IRS has an ambitious goal of hiring 20,000 new employees over the next couple of years.
“They might take seasoned agents and put them on the wealthier taxpayers,” Razi says. “I just don’t see how they’re going to hire enough that quickly and new agents may not be prepared to deal with complicated issues.”
[READ: What Is the Billionaire Tax and How Would it Work?]
Customer Service Improvements
On the bright side, the IRS wants all taxpayers to experience a more streamlined process.
Taxpayers will be able to create an online account for communications, tax credits and deductions, filing assistance, agency call requests, error alerts and status updates. The entire process will be faster, more accurate and will provide enhanced privacy and security.
Mark Luscombe, principal federal tax analyst at Wolters Kluwer, believes this aspect of the plan will be enormously helpful to the majority of taxpayers.
“Most people are trying to do the right thing but it’s been very frustrating because they don’t get answers in a timely fashion,” Luscombe says.
“Last year only about 50% of IRS inquiries were responded to. That’s a significant problem. There was a mass exodus from the IRS of experienced employees as a result of retirement and burnout during the pandemic,” he adds.
The IRS intends to rebuild and strengthen customer service activities, thus ending long telephone wait times.
For people who want to engage digitally, new tools will be available.
“The IRS free e-filing platform will disrupt TaxAct, HR Block and other tax preparation platforms,” says Razi. “It will be a positive for most taxpayers.”
Digitizing filing should stop the paper backlogs of the past. Forms will be mobile-friendly and interactive. Taxpayers will receive refunds and return processing updates electronically.
[Read: How to Get the Biggest Tax Refund This Year.]
What Taxpayers Should Do Now
“Well more than 90% of taxpayers’ primary source of income is on a W-2,” Luscombe says. “That means taxes are already coming out of your income, so the IRS won’t be too concerned. But if you have investment and other sources of income, the IRS will want to be sure it’s properly reported, so make sure it is.”
According to Luscombe, if you’re a partner in a business partnership, shareholder in an S-Corp or have an LLC, the more likely you will be audited — regardless of income. Prepare for that possibility.
All taxpayers should be especially careful from this point forward.
“Have everything in perfect order,” Razi says. “This is not the time to take liberties.” If you’re a business owner or freelancer, your bookkeeping documents, bank statements and finances should be accurate and complete.
“It’s more important than ever to separate your business expenses from your personal expenses, too,” Razi says. “Once an auditor sees you’re commingling, that’s it. They will want to see everything, demanding access to your personal bank accounts and credit cards.”
What’s the Worst That Can Happen?
In the event you’re audited, Razi recommends hiring a professional to take on the tasks involved in your defense. Many CPAs have that experience, but ask first, and if yours doesn’t, request a referral.
If the agent determines that your taxes will be adjusted, you’ll owe a bigger tax bill. A “failure to pay” penalty will be added to the liability, as well as interest on the amount owed. If you don’t pay the bill and avoid the IRS, you could be subject to liens and levies.
As for spending time behind bars, the vast majority of taxpayers ought not worry, assures Razi. “Yes, if you don’t file your return they can throw you in jail, but they don’t want to do that unless you are promoting the idea that you shouldn’t file taxes to other people or messing with payroll taxes.”
Even if you do owe an adjusted tax obligation, the IRS offers installment payment plans.
A Possible Wait for the New and Improved IRS
Although the IRS has developed a detailed plan designed to capture taxes people owe and make the system run more efficiently, delays for some upgrades are likely.
“The IRS is facing hiring issues,” Luscombe says. “They just asked for greater flexibility in what they can pay new employees. I’m not sure they can get this by the House of Representatives, and if they don’t it will be a huge problem. Overall, IRS staffing is down to levels seen in the ’90s.”
As for the technology, that’s not without potential stalls either. To get up to speed, the IRS may have to resort to hiring expensive contractors.
Depending on these factors, there may be more of a “hurry up and wait” situation than taxpayers eager for a streamlined process want — or that the IRS hopes for.
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IRS Pledges More Audits of Wealthy, Better Customer Service originally appeared on usnews.com
