No, the IRS isn’t going away. In fact, concerns about audits are ticking up.
As small businesses prepare for tax season, there are still plenty of benefits for entrepreneurs to pounce on–even as 2023 shapes up to be one rife with tax negotiations on Capitol Hill.
While it’s not remotely possible that House Republicans will succeed in abolishing the Internal Revenue Service–or even prevent the hiring of new or replacement agents–there are key changes at play. Here’s an update for entrepreneurs looking to make the most of tax season.
1. Increased audits?
As the 2023 tax season kicks off, some are concerned about increased audits as the IRS undergoes a major revamp. The overwhelmed agency, with a backlog of millions of returns, is supposed to receive an $80 billion infusion from the Inflation Reduction Act (IRA) signed into law last August. More than half of that chunk is allocated for enforcement action, much to the ire of Republicans. The enforcement action is aimed at narrowing the tax gap, the difference between taxes owed and the amount of taxes the government collects. That gap is believed to total $600 billion per year, according to the U.S. Treasury Department. Yet IRS commissioner Charles Rettig estimated in 2021 that tax cheats cost the agency $1 trillion each year.
The Republican-controlled House is unleashing new legislation, such as the Family and Small Business Taxpayer Protection Act, in an attempt to repeal the billions in IRA funding and quash the IRS from hiring 87,000 additional enforcement agents. The bill passed among party lines earlier in the month, but will die in the Senate, a chamber controlled by the Democrats.
That doesn’t mean Congress is done using the IRS as a political football. “This legislation kicks off a negotiation process that will likely play out over several months,” says Mark Everson, a former IRS commissioner who now works at Alliantgroup, a Houston-based tax consulting firm. Everson adds that both parties will need to consider “what resources the IRS will need to effectively improve services for American businesses and fairly enforce the law.”
Another bill from House Republicans aims to abolish the IRS completely, in addition to creating a 30 percent national sales tax and eliminating the national income tax. Even if the bill, called the Fair Tax Act, passes the House, it will die in the Senate–more political theater.
Which means that small businesses should anticipate that the agency will get the additional funding and thus be able to increase scrutiny of business returns, according to Richard Pianoforte, the managing director of tax at Fiduciary Trust International.
“A portion of these funds will be used for IRS enforcement, which will increase IRS audits,” says Pianoforte, who is also an enrolled agent, the highest credential from the IRS. “Small businesses should be aware there is a higher possibility of an audit than in prior years.” Recent data from the IRS shows that the agency audited 626,204 returns in the last year, slightly down from the 659,003 returns audited in FY2021. While the number of audits has dropped in recent years, an agency many say has been long underfunded could start to course correct.
Prepare (no pun intended) accordingly: Double down on record-keeping to make sure your business has all its receipts if the IRS comes knocking. Here are other issues to keep in mind:
2. 1099-K delays
The IRS has already handed entrepreneurs a small win at the end of 2022, after the agency postponed the highly anticipated 1099-K reporting change. Businesses were gearing up to report their income on PayPal and Venmo transactions that exceeded $600, but the IRS has since punted that reporting threshold into 2024. While businesses are still required by law to report all income received, they now have one additional year to brush up on their bookkeeping.
Business as usual, then, will be the case with payment processors such as Venmo and PayPal, meaning that they’ll continue to issue 1099-Ks to those who surpass more than 200 transactions that exceed $20,000 in combined income. Wendy Walker, a solution principal of the Wilmington, Massachusetts-based tax platform Sovos, says that many payment processors sought out the delay for two reasons: one, the commingling of personal transactions with business transactions; and two, an overall lack of guidance for form recipients.
If anything, it serves as a reminder for entrepreneurs to avoid commingling their personal and business expenses. Otherwise, the IRS could erroneously tax your rent payment sent on Venmo, say. While the reporting change doesn’t apply to personal transactions, mistakes do happen and there is a chance that a 1099-K could be issued. “I think it’s a sigh of relief for the recipients of the 1099-K forms because of the personal transaction issue —this delay gives them time to separate their personal and business transactions to mitigate that issue for 2023 reporting,” Walker says.
3. Bonus depreciatiom to phase out
One tax incentive brought by the Tax Cuts and Jobs Act (sometimes referred to as the Trump tax cuts) is known as bonus depreciation, which allows companies to deduct most costs off new purchases such as machinery and equipment the same year that item is bought. That cut tax bills for corporations that went on investing sprees. But this year the benefit begins to phase out. “Starting in 2023, only 80 percent of the asset’s costs can be deducted as bonus depreciation immediately,” says Jamie Hopkins, a managing partner of wealth solutions at the Omaha-based financial services company Carson Wealth. “This applied to tangible assets with a depreciation life of 20 years or less.” The depreciation will drop to 60 percent in 2024, 40 percent in 2025, 20 percent in 2026 until it phases out entirely by 2027.
About the Author
The Honorable Mark W. Everson was the nation’s 46th Commissioner of Internal Revenue Service serving from 2003 until 2007. Prior to joining the IRS, Everson held Bush administration posts as Deputy Director for Management at the Office of Management and Budget and Controller of the Office of Federal Financial Management. Everson also served in the Reagan administration, holding several positions at the United States Information Agency and the Department of Justice, where his assignments included Deputy Commissioner of the Immigration and Naturalization Service. At the state level, Everson oversaw the Indiana Workforce and Unemployment Insurance Systems under Governor Mitch Daniels.
In the private sector, Everson served as Group Vice President of Finance at SC International Services, Inc. (SkyChefs), a $2 billion food services company, and as Senior Vice President with the Pechiney Group, then one of France’s largest industrial groups and the largest packaging company in the world.
As Vice Chairman of alliantgroup, Mark helps guide strategic and operational planning for the firm. Mark’s extensive private sector and government background afford him insights on tax incentives and regulatory matters which he shares with businesses across the country on behalf of alliantgroup. Mark is consulted regularly by the media concerning issues of tax administration and tax policy and how they impact businesses.