As the tax season approaches, many Americans are wondering what changes they can expect from the IRS, especially given the recent funding allocated to the agency through the Inflation Reduction Act. This bill, passed by Senate Democrats in August 2022, allocated nearly $80 billion to the IRS over the next decade, leading to questions about the potential for increased audits. 

So, will there be more audits this year? For average earners, the short answer is: probably not. However, for business owners and high earners, the answer is yes. 

The founder of Milikowsky Tax Law, John Milikowsky, explains the impact from the Budget Reconciliation Bill in detail. Check out the video below for more information:

In this article, we will delve into the ramifications of the Inflation Reduction Act, which has provided $80 billion to the IRS. We will also examine the potential impact on audits for taxpayers in the current year. Despite the perception that this funding would result in a higher rate of audits, it is unlikely that the audit rate for average earners will see a significant increase.

The Inflation Reduction Act: What is it and What Does it Mean for Taxpayers?

In August 2022, Senate Democrats passed the Inflation Reduction Act, which allocates nearly $80 billion to the International Revenue Service (IRS) and leaves taxpayers asking: What are the tax implications of this bill? Will there be more audits? How will audits change?

Let’s discuss where exactly the money is going. 

Enforcement: IRS is Hiring

According to the 2021 IRS Data Book, IRS in Fiscal Year 2021 had about 79,000 full-time equivalent (FTE) employees, and about 35,000 of them were dedicated to enforcement activity.

In 2021, IRS closed about 739,000 tax examinations and processed more than 261 million tax returns and supplemental documents. This number of tax examinations in 2021 was less than half of the number of tax examinations in 2012.

Average Earners Will Likely Not Be Impacted

Statistically, taxpayers reporting either no income or over $1 million have the highest likelihood of being audited, while those with middle incomes have a low chance. This trend is not expected to change in the future, despite the $80 billion in funding for the IRS under the Inflation Reduction Act. In fact, this funding may benefit those with average incomes rather than harm them.

As discussed, the $80 billion in funding for the IRS is allocated as follows: $45.6 billion for enforcement, $25.3 billion for operations support, $4.8 billion for business system modernization, and $3.2 billion for taxpayer services. 

Ideally, the IRS will use a significant portion of the funding for taxpayer services to hire more staff and provide more assistance to taxpayers who need help with filing or have questions outside of tax season. This could potentially lead to faster processing times for paper returns and quicker refunds.

The allocation of funding towards enforcement has raised concerns among many people. However, the IRS has stated that taxpayers earning less than $400,000 a year should not expect an increase in audits. This means that the average American does not have to be concerned.

Self-Employed Business Owners Are More Likely to be Audited

Self-employed business owners will be more likely to be audited as a result of this bill. Why? IRS is focused on self-employed people, whose financial situations can become tricky.

For example, in these businesses, there are no W-2 jobs with a paycheck; there is just money coming in and going out. This increase in audits means that self-employed people will have to be even more careful in filing the proper forms and providing the correct taxable income.

High-Earners or High Income Taxpayers Are More Likely to be Audited

A high-income taxpayer, or high-earner, is defined by IRS as someone who generally receives income in excess of $100,000 during a tax year. However, we typically see audits for high-earners of $200,000, $250,000, or higher.

According to Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division at IRS, “The IRS is committed to fairness in the tax system, and we want to remind people across all income categories that they need to file their taxes…These visits focusing on high-income taxpayers will be taking place across the country.”

Non-filers

While non-filers can be considered someone who did not file taxes for a single year, usually we are looking at a taxpayer who has skipped at least a couple years or more. At Milikowsky Tax Law, we have some clients who haven’t filed tax returns for five, six, seven years, a significant amount of time.

House Republicans Vote to Rescind I.R.S. Funding

In one of their first legislative actions of early 2023, House Republicans voted to reduce funding for the Internal Revenue Service (IRS). Conservative lawmakers are attempting to weaken President Biden’s $80 billion revamp of the struggling agency. 

However, the bill, which passed in the House by a vote of 221 to 210 along party lines with all Democrats voting against it, is unlikely to pass in the Democratic-controlled Senate or be signed into law by President Biden.

In Summary

The Inflation Reduction Act, passed by Senate Democrats in August 2022, allocated nearly $80 billion to the IRS over the next decade, leading to questions about the potential for increased audits. However, it is unlikely that the audit rate for average earners will see a significant increase. Statistically, taxpayers reporting either no income or over $1 million have the highest likelihood of being audited, while those with middle incomes have a low chance. This trend is not expected to change in the future, despite the $80 billion in funding for the IRS under the Inflation Reduction Act. 

The allocation of funding towards enforcement has raised concerns among many people. However, the IRS has stated that taxpayers earning less than $400,000 a year should not expect an increase in audits. Self-employed business owners and high-income taxpayers will be more likely to be audited as a result of this bill.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how the Inflation Reduction Act will impact them.

At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits.Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.

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