by Andy Medici and quotes from Eric Hylton, Former IRS Commissioner of the Small Business/Self Employed Division; alliantgroup National Director of Compliance
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The Inflation Reduction Act set aside $79 billion to beef up the IRS, leading to concerns about the impact of increased audits in many corners.
But experts say many small businesses will likely be unaffected by an increase in audits, but it will depend on their size and their definition of small business.
“Now is everyone going to get audited? Of course that’s not going to be the case,” said Eric Hylton, a former IRS commissioner for the small business/self employed division and current national director of compliance at Alliantgroup, who stressed the agency has said it would not increase audit activity on individuals and small businesses making less than $400,000 per year. “If it’s over $400,000, you will see an impact. If you are under $400,000, you won’t see an impact.”
The approximately $79 billion in funding — spread out over 10 years — is split among different categories, with $45.6 billion going to enforcement, $25.3 billion to operations support, $4.8 billion in business systems modernization and $3.2 billion for taxpayer services, according to the Tax Foundation.
Some of that spending will actually benefit business owners, Hylton said, by improving customer service and response times and by helping to reduce a tax return backlog that has grown to more than 21 million returns.
Those backlogs hurt some small-business owners who were trying to get a Small Business Administration Economic Injury Disaster Loan or take part in other Covid-19 relief programs.
“This funding is sorely needed in order to modernize the service so that they can help overall with some of this backlog,” Hylton said. “I think you will see a significant focus on customer service from the IRS’ vantage point. Improving the backlog but also just looking at technology, data analytics just to improve overall service for taxpayers.”
Meanwhile, the additional enforcement will most likely focus on high-income, high-net-worth taxpayers and corporations that account for a disproportionate share of unpaid taxes, he stressed, but for which the IRS had limited resources to tackle.
In an Aug. 4, 2022 letter to Congress, IRS Commissioner Charles Rettig said the Inflation Reduction Act will let the agency get back to challenging areas, including large corporations and global high-net-worth taxpayers.
“These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” Rettig said in the letter. “Enhanced IT systems and taxpayer services will actually mean that honest taxpayers will be better able to comply with the tax laws, resulting in a lower likelihood of being audited and a reduced burden on them.”
He stressed the agency has fewer front-line, experienced examiners in the field than any time since World War II, and fewer employees total than any point since the 1970s.
A White House fact sheet on the Inflation Reduction Act stated small businesses will have better access to the benefits they are entitled to because of the extra IRS funding in the legislation. And Treasury Secretary Janet Yellen stated in a directive to the IRS that the rate of small businesses that make under $400,000 that are audited will not increase because of the funding in the legislation.
The National Federation of Independent Business, which had supported an amendment in the legislation shielding smaller businesses from increased audits that was ultimately defeated, said in an August blog post the legislation was too heavily focused on enforcement rather than dealing with the agency’s backlog of tax returns.
“The IRS is grappling with over 21 million unprocessed paper returns, an issue that is consistently reported to NFIB as a major issue for many small-business owners,” said NFIB Vice President of Federal Government Relations Kevin Kuhlman in a statement after the bill’s passage.
The NFIB also stressed that additional compliance burdens could soak up time and resources small businesses need to grapple with current economic challenges such as inflation and workforce shortages. And it was also still worried that increased IRS enforcement could impact small-business owners.
“Those who support the legislation argue the strict enforcement will only affect wealthy tax cheats, but NFIB remains concerned that these efforts will negatively impact law-abiding business owners. Language in the bill states that the revenue title does not intend to increase taxes on any taxpayer or small business with a taxable income below $400,000, but similar protections are not afforded to the increased enforcement activities,” the NFIB stated.
Meanwhile, nearly 1.6 million taxpayers and small-business owners may see relief of up to $1.2 billion in late tax-filing penalties.
The IRS said in a recent notice that individuals — and small-business owners — who filed taxes late in 2019 and 2020 could automatically be eligible for forgiveness or a refund on penalties already paid, according to the notice. Typically, late filers are assessed a penalty of 5% per month, up to 25% of the unpaid tax bill when a federal income tax form is filed late, according to the IRS.
The Inflation Reduction Act and other tax credits for small businesses
And small businesses that are struggling still have a potentially lucrative Covid-19 relief opportunity available in the form of the Employee Retention Credit.
Initially, the ERC was a quarterly, refundable tax credit based on wages for business owners to retain staff during the Covid-19 pandemic. It was set at 50% of up to $10,000 in qualifying wages per employee for the last three quarters of 2020. The American Rescue Plan Act extended and expanded the ERC to include up to 70% of $10,000 in qualifying wages per employee per quarter in 2021, making it much more lucrative to business owners.
Experts told The Playbook that small-business owners should document everything, in order to make sure they can prove their case if the IRS has questions.
Meanwhile the recently-passed Inflation Reduction Act a doubling of the refundable research and development tax credit.
The Inflation Reduction Act also includes a tax credit for qualifying electric vehicles of up to $7,500 for vehicles weighing less than 14,000 pounds, and up to $40,000 for vehicles that weigh more than that, subject to certain limitations. The credit is slated to last until the end of 2032, according to the legislation.
Here is a list of other, more specific tax credits, loans and grants available in the Inflation Reduction Act.
About the Author
Hylton held several prominent positions at the IRS, including serving as Deputy of the Criminal Investigation Division and as CI’s head of International Operations. As National Director of Compliance, Eric employs his years of experience at the IRS to assist alliantgroup’s clients as an ambassador for U.S. small and medium sized businesses (SMBs) and in helping others become tax compliant.