Biden’s $ 80 billion plan to encourage IRS audits could possibly be geared toward small companies
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Biden’s suggestion comes as the IRS is grappling with the volume and complexity of returns.
The agency lost more than 33,378 employees between 2010 and 2020, including auditing returns and collecting unpaid taxes.
These cuts have resulted in fewer audits for high-income filers. In 2020, the IRS audited fewer than two in 100 taxpayers who made more than $ 1 million, according to a report from Syracuse University.
While the number of millionaires has nearly doubled since 2012, tax audits have fallen 72% from 40,965 in 2012 to 11,331 in 2020.
However, the decline in funding has hit more than just the rich.
A recent report by the National Taxpayer Advocate found that the IRS only answered 24% of calls, making it difficult for those to grapple with the numerous tax changes amid the pandemic.
Proponents say Biden’s proposal could help pay off his $ 1.8 trillion plan for American families, while opponents argue that it could weigh on small businesses without guaranteeing the promised tax revenues.
“A robust and sustainable investment in the IRS is necessary to ensure that it can administer a fair and effective tax system,” said IRS Commissioner Chuck Rettig in an email.
He said the agency needed more resources to investigate underreported incomes and prosecute high-income taxpayers who evade tax liability through “complex systems”.
You also need improved technology for complex tax filing and revenue tracking.
“And it requires access to better information so that the agency can target its efforts on the most outrageous criminals and help compliant taxpayers avoid unnecessary and costly audits,” he said.
The increase in the budget will also make it easier for the IRS to provide timely answers to questions to taxpayers, he said.
Small Businesses Affected
The plan could lead to more audits for some small businesses, particularly high income earners, according to financial experts.
“If you’re the person who makes over $ 400,000 a year, you should feel like you have a goal on your back,” said Paul Axberg, certified financial planner and CPA at Axberg Wealth Management in Sun City West, Arizona .
Cash only deals
Certain small businesses may be audited under the plan.
“I think the industries that should be affected are those in cash,” said Luis Strohmeier, a Miami-based CFP and partner at Octavia Wealth Advisors.
He expects the agency to scrutinize small businesses that only offer cash, such as restaurants, retail stores, salons, and other service businesses.
“I think if you go after mom and dad, where the agent visits them, and they all have their receipts in a shoebox, that might be useful,” said Strohmeier.
He said those with looser records should take the opportunity to clean up their books.
Make sure your books are checked by your accounting firm and that everything is in place, just in case someone knocks on your door.
Partner at Octavia Wealth Advisors
Passing a tax audit
Calling for an audit can be nerve-wracking for small businesses. But those who stick to the rules shouldn’t be afraid of run-ins with Uncle Sam, say financial experts.
“It’s always about keeping good records,” said Axberg.
He said it was important to keep receipts for all expenses and to keep books updated. In the event of an audit, it is easier for a CPA to secure your position with pristine records.
While the cheaper, do-it-yourself approach may be tempting, Strohmeier is pushing against it.
“Make sure your books are checked by your accounting firm and that everything is correct, just in case someone knocks on your door,” he said.
Tax audits usually last three years. But once the agency observes a small business with organized records, compliant and up-to-date records, they’ll usually leave you alone, Strohmeier said.
However, the proposal is not final and all companies concerned have time to prepare.
“I think you should just be aware that the chances of an audit are higher,” said Axberg.
(This article has been updated to add a comment from IRS Commissioner Chuck Rettig.)