In the past, taxpayers may have felt the slowing of the Internal Revenue Service (“IRS”) tax enforcement and audit activities impacted by budget cuts, employee attrition and the COVID-19 pandemic. As a result of newly enacted legislation, the winds of change are coming!

What is changing for IRS audits?

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, H.R. 5376 (the “Act”). Among other things, the Act increases the IRS budget by nearly $80 billion over ten years.[1] The additional funds are targeted at different functions in the IRS including over $45 billion allocated for tax enforcement which includes tax audits, litigation support, criminal investigations, and other similar items.[2] The Congressional Budget Office estimates the tax enforcement efforts will generate an additional $124 billion of net savings from uncollected taxes owed to the U.S. Government over the next decade.[3]

Although the IRS hasn’t yet released exact numbers for new IRS employees it will hire under the Act, what is clear is that the IRS will significantly increase staffing which means more IRS auditors conducting examinations of taxpayer returns.

Whether you are a large, midsize or small business or an individual, every taxpayer should be aware of the expected substantial increase in tax enforcement and prepare accordingly.

What should taxpayers do?

Taxpayers should review their federal tax returns still open for audit and determine any risks.

Taxpayers may create “audit ready” files containing the filed federal tax forms, financial detail support, and any other documents used to report the tax information on the return(s).

Taxpayers should determine whether the return(s) take any positions for which the IRS may inquire further. In such instances, taxpayers should not only gather the relevant documentation, but also, consider creating any necessary technical write-up analyzing the taxpayer’s particular facts and law that permit such reporting positions.

Prospectively, taxpayers should create “audit ready” files contemporaneous with their future tax filings while the documentation and reasoning for the tax reporting positions are fresh.

Tax professionals are a good resource to assist taxpayers with creating sound “audit ready” files, rather than, waiting until the commencement of an IRS audit. By creating “audit ready” files today, taxpayers are better prepared to support and defend tax positions during future IRS audits.

Once the IRS notifies the taxpayer of an audit, a taxpayer should consider engaging a tax professional to handle the audit to ensure proper responses to IRS requests and positioning of any arguments on particular tax positions.

As with most things in life, it is better to prepare today for a potential storm rather than get caught in the rain without an umbrella!

The above article is intended for educational purposes only and should not be relied upon as legal advice nor creating any attorney-client relationship between Mr. Hurley and any person reading this article. Any person requiring tax representation or advice should retain the services of a tax professional.

Author: John E. Hurley, Esq., Managing Member, Hurley Tax Law, PLLC

Phone: 561-704-3813

Website: www.hurleytaxlaw.com

Email: jhurley@hurleytaxlaw.com

[1] Inflation Reduction Act of 2022, https://www.democrats.senate.gov/07/27/2022/inflation-reduction-act-of-2022

[2] Id.

[3] BY THE NUMBERS: The Inflation Reduction Act – The White House