Additional IRS funding for law enforcement raises audit concerns

The $80 billion in additional funding over the next decade for the Internal Revenue Service from the Cut Inflation Act is supposed to be used to improve taxpayer service, modernize outdated IRS technology, increase enforcement efforts and hire more staff to process tax returns and replace retirees. employees, but many taxpayers fear that the funds will lead to more audits.

Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig both assured that the funds will not be used for audits of taxpayers who earn less than $400,000 a year, as promised by the Biden administration and Democrats who passed the bill along a party line. vote (see the story). But the issue has become highly politicized, with Republicans on the Senate Finance Committee introducing a bill this week aimed at preventing the IRS from using the funds to audit taxpayers who earn less than $400,000 a year after failing. to get such an amendment attached to the bill last month. (see the story). The full text of the bill has not yet been released, but according to a summaryit would also temporarily ban the hiring of additional IRS employees “until some level of taxpayer service has improved, and for other purposes.”

This could well cripple the IRS at a time when it needs additional resources to deal with the continuing backlog of unprocessed tax returns from earlier this year and last year, as well as millions of revenues that should flood the agency from tax extensions. The IRS also has to deal with various other tax provisions of the Cutting Inflation Act, such as tax credits for renewable energy and electric vehicles, as well as implementing the new “tax accountant” on billionaire corporations and the excise tax on corporate shares. redemptions. The IRS also needs to at least conduct a study on implementing its own online tax filing system for taxpayers who haven’t been able to take advantage of the little-used Free File program it offers with the tax industry. tax software.

The IRS Headquarters building in Washington, DC

Andrew Harrer/Bloomberg

That has left some tax experts skeptical that the IRS can avoid using the extra funding it receives to avoid auditing taxpayers who earn less than $400,000 a year. A recent online survey by Sikich, a Chicago-based Top 30 company, asked a group of 250 midsize business owners and finance managers about their attitude toward the Waste Reduction Act. inflation. When asked if they thought increased IRS enforcement activity would impact people with incomes below $400,000 a year, 48 (19.2%) said no. , but 202 (80.8%) answered yes.

“With the IRS getting so much extra money and doing more audits, it’s likely to affect people at all levels and businesses as well,” said Jim Brandenburg, a Sikich tax partner.

The company also asked what area of ​​tax compliance concerns them the most with the increase in IRS funding and the expected increase in compliance activity. It found that 83 (34.9%) were most concerned about business income tax, 26 (10.9%) were most concerned about employee retention credit checks, while 129 ( 54.2%) were most concerned about personal income tax.

However, Brandenburg doubts the dire warnings from Republicans about the IRS hiring 87,000 more agents to audit taxpayers will happen, underscoring the IRS’ other needs, including a wave of retirements in the overloaded agency.

“They’re going to lose a good chunk of their current agents and other IRS officials over the next five years or so just to normal retirement,” Brandenburg said. “They’re trying to keep what they have now and deal with that, not to mention trying to add another 87,000. It’s going to be a big challenge for them to be able to manage that in the next five to 10 years.”

“They need to recruit more agents, but they also need to put them in other places,” said Todd Simmens, technical manager of tax policy and legislation at Top 10 Firm BDO USA. “They have to get people to process returns, answer phone calls – a lot of those things that just aren’t happening right now.”

Tax credits for electric vehicles

Sikich also asked about another provision of the Cut Inflation Act, increasing tax credits for electric vehicles, and found that about 80% have no intention of doing so. get one anytime soon, while around 17% don’t own one but are considering and only 2% own an electric vehicle at this stage. “You would have thought there might be a few more watching it, but, you know, 80% don’t have it and aren’t really watching one at this point,” Brandenburg said.

The expansion of the electric vehicle tax credit in the Cut Inflation Act has some limitations, requiring automakers to source components primarily from the United States (see the story).

“EV credit is great when you peel the onion on it and really examine it,” said Tom Alongi, audit partner at UHY, a top 30 company in Sterling Heights, Michigan. “To date, there may be one or two vehicles that would actually meet the requirements of the bill. But new vehicles will be rolled out that will ultimately be impacted favorably by the credit. But 40% of the assembly and part battery content has to be in the United States and that’s going to increase, I think, to almost 80% by 2027. That’s what we need to do to reshape manufacturing and the automotive sector to accelerate the growth of electric vehicles.

This will put pressure on automakers to ramp up production of electric vehicles, which are already in high demand. “We are now in a race against time when you think about where we are in the market’s total electric vehicle production of less than 3% of total vehicles to where we want to get to,” Alongi said. “It probably won’t be due to a lack of demand. It’s probably really going to be on the supply side. Over 57% of critical minerals are controlled by China, so we have a lot of catching up to do. There’s obviously incentives in the minerals and mining bill, so it’s going to be critical for us to build that supply chain in the U.S. It’s not going to happen overnight, but we’re trying to accelerate as fast as you can. Tesla for over three years, I can say it’s very viable. It’s not for everyone, but you can definitely get to 40 or 50 percent of the market in 10 to 15 years .”

The new requirements for the EV tax credit do not take effect until January 1, 2023. To help tax professionals advise clients on what to do in the meantime, the IRS quickly released immediate guidance on the tax credit after the legislation is passed (see the story).

Renewable Energy Incentives

Other energy-related provisions are included in the bill to encourage greater use of renewable energy, but these too could have limited impact initially.

“For residences, you can get a 30% credit for solar,” Alongi said. “Well, there already was. Last year’s credit was 26%, so I don’t know if the extra 4% really entices you to go out and put solar on your roof. They made some changes to what is sort of the non-commercial credit, the 25C credit, for heat pumps, the limit is now $2,000 instead of $1,200. some minor changes, but I don’t know if these really shake things up And the $60 billion in this bill that’s being set aside – they call it environmental justice – will it really spur the low-income neighborhoods to adopt solar and wind power?

The IRS will need to use the additional funding to provide guidance on tax credits and other tax provisions, as well as to improve service overall with the additional funding.

“The service levels you get at the IRS are terrible,” Simmens said. “If they can get back to where they were years ago, I think a lot of properly allocated funding could get them there and it should. I read a lot of people saying, oh, they’re going to get 87,000 Tax officials. I don’t believe that’s what’s going to happen or what’s planned.”