The IRS will receive an extra $80 billion in funding over the next decade thanks to the Inflation Reduction Act. Understandably, this announcement has caused some apprehension among taxpayers.
Does this new funding mean your risk of an audit will go up this tax season? Let’s look at the facts. We’ll also review how you can help protect yourself from an audit (just in case).
How will the IRS use the new funding?
The additional funding promised to the Internal Revenue Service will be distributed over the next 10 years. Here’s how the IRS has said it will utilize the extra money:
- Specialized tax enforcement teams focused on auditing large corporations, complex partnerships, and high-net-worth earners (those earning $400,000 or more)
- Enhanced IT systems to modernize its outdated technology and better keep pace with the agency’s increased responsibilities and challenges
- More tax service employees dedicated to providing better and faster customer support for taxpayers
The agency has also been struggling to provide adequate taxpayer services as it works through a backlog of unprocessed tax returns. For instance, in the tax year 2022, the IRS only answered 18 percent of phone calls from tax filers — a drastic drop from 59 percent in 2019.
Will tax audits increase for middle-income Americans and small businesses?
In a letter to the IRS, Treasury Secretary Janet Yellen expressly directed the agency not to use the extra funding resources to target “small business owners or households below the $400,000 threshold.”
This means low- and middle-income households should not expect to see an increase in audit rates over the coming years.
The IRS believes that technology and customer service improvements will lessen misreporting and misunderstandings that can lead to audits. Because of this, the agency believes these extra resources should actually reduce audit rates for the average American and small businesses.
But a vast percentage of these auditing efforts will target “high-end noncompliance” — large businesses with complex federal income tax returns and higher-income individuals earning $400,000 or more yearly.
Why is the IRS increasing audits on large corporate and high-net-worth taxpayers?
By cracking down on wealthy individuals and large businesses who aren’t paying their fair share of taxes, the IRS hopes to reduce the nation’s tax gap and lessen the burden on honest taxpayers.
The IRS has had difficulty keeping up with challenges brought about by the COVID-19 pandemic, partially due to understaffing and outdated IT systems. Audit rates have also been down over 50 percent compared to a typical tax year, increasing the country’s tax gap (and, therefore, U.S. federal deficits).
The tax gap is the difference between total taxes owed by individuals and businesses and actual taxes paid on time. By ensuring all taxable income is reported correctly with the help of audits, the IRS can raise federal revenue without increasing tax rates for the general population.
How do I prepare for the chance of being audited?
There’s no foolproof way to avoid a tax audit. Still, there are proactive steps you can take to ensure you’re prepared just in case — namely, reporting everything correctly and keeping good records to back up your claims.
If you are an individual taxpayer earning less than the $400,000 threshold, you should concentrate on making sure you’re reporting all your income correctly. Don’t forget to report any investment income — such as profits from crypto trading — along with your regular salary.
If you are a small business owner, make sure you take extra care to save all your receipts and keep good business records. In the event of an audit, having this kind of paperwork on hand will make it easier for the IRS to verify that your federal income tax return is correct.
Protect yourself with Protection Plus Audit Defense
When you e-file your income tax return with TaxAct®, you’ll have the option to enroll in Audit Defense provided by Tax Protection Plus.*
Getting an audit notice from the IRS can be scary for many people. Audit Defense gives you peace of mind by helping handle the situation on your behalf. In case of an audit, you simply call Protection Plus at 866-942-8348 to open a case. A trained tax audit specialist will guide you through the next steps and manage any necessary correspondence with the IRS for you.
Audit Defense gives you federal and state audit assistance for three years after filing your return. In addition to audit assistance, Protection Plus can also help taxpayers with tax debt relief, denied tax credits, and tax fraud.
If the IRS comes knocking, Audit Defense has your back. Add this protection when e-filing your taxes with TaxAct to make sure you’re covered in the event of an audit this tax season.