Millions of unprocessed paper tax returns have bogged down the Internal Revenue Service (IRS). Frustrated taxpayers have experienced unprecedented difficulty reaching the IRS, leaving calls unanswered. To end this problem, Congress passed the Inflation Reduction Act – infusing much-needed funds into our nation’s federal government agency and stabilizing its future.
The IRS will receive a massive injection of $80 billion in funding over the coming decade. Of this, an impressive $35 billion will go towards taxpayer services and business operations, helping them achieve their goal of modernizing IT systems that have withstood decades of use – some even since the 1960s! The upgrades should improve paper tax returns are processed quickly.
With extra money in the IRS’ budget, an increase in audit rates could occur for those earning $400K or more. U.S. Treasury Secretary Janet Yellen told the Internal Revenue Service in August that if the Inflation Reduction Act became law, additional IRS resources should not be used to increase audit rates on taxpayers making under $400,000 a year. However, taxpayers beyond this threshold should prepare to keep their tax affairs in tip-top shape! Timely filing of accurate records is critical for all filers to avoid trouble from the Internal Revenue Service.
Here are a few special areas of concern:
- Cryptocurrency – You can expect increased IRS audits dealing with cryptocurrency transactions. If you’re one of the millions of Americans who engage in such transactions, keep good records and report any income you earn.
- S Corporations – If you’re an S corporation shareholder-employee, you should have your S corporation pay you an arguably reasonable salary and benefits and document how you arrived at the amount.
- Syndicated Conservation Easements. Be aware that the IRS is auditing all of these deals, and its scrutiny of them will likely grow.
- Offshore Accounts. You’re supposed to report these to the U.S. Treasury. Failure to do so subjects you to substantial penalties. In recent years, the IRS has gone after banks and bank account holders who hide assets in offshore accounts. We expect the IRS to emphasize identifying and tracking such offshore assets in future years.
- Partnerships – Partnerships and multi-member LLCs taxed as partnerships (this describes most of them) are already the subject of the Large Partnership Compliance program, which uses data analytics to select large partnership returns for audit. The IRS will likely devote more resources to this program in the future.