The new Inflation Reduction Act approves IRS funding with allocation to hire new IRS agents. While these hires won’t all be additional enforcement agents, and the hiring will be gradual over time, this authorization could significantly impact taxpayers.
In the paragraphs below, a tax consultant with the offices of Levy & Associates Tax Consultants answers some of the most important questions you may have about the new Inflation Reduction Act, IRS audits, and hiring.
The Inflation Reduction Act allocates approximately $78 billion for IRS funding, phased in over ten years. The Internal Revenue Service will certainly use some funds for hiring, raises, pensions, benefits, and other employment costs, with as much as $45.6 billion available for “enforcement.”
A May 2021 report from the Treasury Department estimated that the IRS may be able to hire 87,000 employees by 2031 with this type of funding. While it can be assumed that a significant portion of these positions could be enforcement agents, that doesn’t necessarily mean that these are now positions (vs. replacements). In addition, many will also likely work in support roles, such as IT technicians for IRS offices, taxpayer services support staff, and experienced corporate and high-income auditors.
As many as half of current IRS employees are approaching retirement in the next few years. Many of the new hires to the agency will be replacement hires. New hires will include international tax professionals to address the growing concern of global corporations not paying their fair share for American operations.
The risk for targeting in IRS audits could increase for some groups. While it’s unlikely that W-2 earners with a few write-offs or deductions face a higher risk of an audit, self-employed wage earners, business owners, and middle-income earners may see higher instances of IRS audits.
While the government states that the new legislation generally targets corporate and high-income tax dodgers, certain red flags on a tax return can potentially trigger an audit for anyone. Additionally, new hires won’t get high-earning assignments immediately.
New auditors will likely receive six months of training and get their initial experience through smaller cases tracking down unreported income from small businesses and independent contractors. Taxes collected from W-2 employees with no filing errors won’t likely require an audit.
The IRS uses automated software to assign a score to a tax return. The software may flag you in the system if you file a tax return with more deductions or tax credits than are acceptable. High-scoring tax returns often get flags for IRS audits.
For example, despite the earned income tax credit being a tax break for low- and middle-income families, claiming a tax credit can flag your return for an audit if there are other potential discrepancies.
Another thing to be aware of is disproportionate deductions compared to earnings. If you earned $120,000 but claimed deductions of $40,000, the system would find it outside the acceptable range.
While the government may not hire 87,000 IRS agents tomorrow, your small business or multiple-income household may be at risk in the future for IRS audits. CEO and President of Levy & Associates Tax Consultants Lawrence Levy recently joined Fox News Rundown podcast to explain the current issues with the IRS and why he is skeptical additional funding could shift their behavior. You can listen here.
Contact the offices of Levy & Associates Tax Consultants for help with accounting, audit defense, back taxes, liens, tax resolution, and more. Call us today at 1-800-TAX-LEVY or contact us online to get started with a free tax review.
Levy & Associates is available for free initial consultations. We’re happy to answer any questions you have about the audit process or address any concerns about your specific situation.
There’s never a good time to be audited, and the time-consuming process will take away from your business or family if you try to face it alone. Let us handle and coordinate communication, so you can return to your daily life.