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The tax man is taking major credit for the Biden administration’s recently passed $80 billion inflation-reduction bill. Some people are missing out.
“This is a middle finger to the American people,” said Florida Governor Ron DeSantis. Joe Hinchman, executive vice president at the National Taxpayers Union Foundation, told the New York Post that small businesses will be the first to suffer. “The IRS [Internal Revenue Service] “They should target small and medium businesses because they are not struggling,” he said. “We’ve seen this game before…the IRS says, ‘We’re going after the rich,’ but when you’re trying to collect that much money, the rich can only get you so far.
The IRS and the Biden administration say small businesses shouldn’t worry.
“These resources are absolutely not about increasing audit scrutiny of small businesses or middle-income Americans,” IRS Commissioner Charles Retting wrote in a letter to lawmakers. “Thanks to improved technology and customer service, the likelihood of an audit will be lower,” Treasury Secretary Janet Yellen said.
Who to believe? Does your small business face more scrutiny from the IRS? Will your tax bill go up as a result? The answer to both questions: Don’t panic.
It is true that the IRS is going to use part of the $80 billion in funding to hire about 87,000 new agents. But 50,000 IRS employees are expected to retire or otherwise leave the agency over the next five years. Therefore, most of the employees will replace the existing ones. Granted, the IRS currently has about 74,000 employees, so even adding 37,000 net new employees is a big jump.
The rest of the funding — which will come over the next 10 years, by the way — will be aimed at upgrading the agency’s woefully outdated systems. These are the systems behind the delay in getting refunds and the countless wrong notices that business owners and their accountants are currently wasting countless hours trying to respond to.
More agents. Better systems. Yes, there will be additional audits. And many small businesses will suffer. But again, don’t panic. Just look at historical compliance data from the IRS.
In the year In 2019, 2.9 percent of corporate returns were audited. But these aren’t really small businesses. If you’re a small business owner, filing a specific tax return like a partnership or S-corporation is very likely. In 2019, 9,093,343 returns were filed and 5,283 were audited. No, I’m not missing any zeros. This is less than 0.1% of all small business tax returns. Individual audits between $50,000 and $500,000 cost about 0.1 percent. That’s one-tenth of 1%.
Suppose the number of audited small businesses triples in the next 10 years. Using the numbers above, we see 15,849 “interesting” businesses. Meanwhile, 9,077,494 remain untouched. There are better odds of winning roulette in Vegas than being selected for an audition.
Yes, I understand that responding to a simple notice from the IRS can be a waste of time and money, even if your books are squeaky clean. I know most business owners report their income honestly. I know dealing with the government is very persuasive and no one likes to pay taxes.
But there’s something most of us don’t like to admit: Audits are actually a good thing. Some taxpayers keep loyally out of fear of being caught. Taxes are a necessary evil to ensure the collection of debtors. In fiscal year 2021 alone, the IRS closed 738,959 tax return challenges, resulting in nearly $26.8bn in additional taxes. Who will make up for that shortfall without an audit? Who is you and me?
Another thing: Most experts don’t see an increase in audits until at least 2026, so we have a few years to prepare. And there are many things a small business can do to avoid being branded. Simple things.
Pay your estimated taxes on time. Respond to inquiries quickly. File your returns when they arrive. Make sure items are added correctly and attached to the filing documents (such as W-2s and 1099 forms). Don’t underpay yourself. Don’t pay yourself too much. Don’t take too many offers. Don’t make a lot of money in one year and don’t lose a lot of money in many years. If you do, at the very least, have very, very good explanations… and documentation.
As an accountant and business owner, it might surprise you that I support the $80 billion going to the IRS. why? Because the more this agency does to improve its efficiency, the faster we can get answers to our questions. And the more technology an agency can use to do the job, the less likely they are to deal with them, and the more clients. Audit them. We are ready.
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