The Inflation Reduction Act , passed in August 2022, didn’t have much in it that impacted the average small business. However, one number in the act did start to get peoples attention – $80 billion (well, technically $79.6 billion – but we’re rounding up). This $80 billion is to be allocated to the IRS over the next ten years in incremental pieces. With this chunk of change in the IRS’ hands, many small business owners have wondered how this will impact them. Some fearful, asking if this will increase their chance for audit. Others hopeful, asking if this will increase their chance that the IRS processes their refund claim faster – be it for their income tax return or an Employee Retention Tax Credit (ERTC) claim.
While there is still a fair bit of unknown with regard to this funding, here we will outline what we know so far and how government officials have communicated this money will be used.
Address the Backlog
Currently, the IRS has millions of unprocessed prior year business and individual tax returns. Add the amended payroll tax returns from the ERTC on top of that, and the agency is drowning in returns that need to be processed and refunds that need to be assessed and paid out. A good chunk of the $80 billion in funds is geared towards clearing this backlog of returns and getting the IRS up-to-date (or at least, more so than they are now).
What this means for you, the small business owner, is that if you have an outstanding return that hasn’t been processed or a refund you have been waiting on for months, this cash influx should hopefully help the IRS to be able to accelerate these items. However, as you know – hope is not a plan, and you or your tax advisor should still be actively monitoring outstanding returns or refunds and proactively following up with the IRS to understand status and accelerate processing.
Enhance Customer Service
Just saying the IRS and customer service in the same sentence feels like an oxymoron. The IRS has always been known for being extremely hard to get a hold of – but recently it’s reached a whole new level, with about 9 out of 10 calls not being answered. And when they do pick up the phone, typically its accompanied with a one-hour plus wait time. There are some tricks to get through to them, such as calling first thing in the morning or in the evening just before they close, but even these strategies have not been as effective as they used to be. Fortunately, a portion of the $80 billion is meant to be used to improve customer service. New technology and thousands of new customer support hires should help improve this dire situation.
However, despite the improvements, the average small business owner, still doesn’t have the time to sit on hold with the IRS or not have their phone call answered at all. As such, your tax advisor should be leading the charge with IRS communications on your behalf. And you should ensure you have an IRS online account for any individual tax matters you’re monitoring. While there is no online system currently for business tax, being able to monitor individual tax items online saves significant time and provides greater transparency.
Increased Enforcement
While getting through the backlog and improving customer service are just the kind of thing small business owners, and taxpayers in general, would like to see. Unfortunately, additional funds in the IRS hands also mean something else: increased enforcement. Potentially higher audit rates, additional tax notices, and overall higher scrutiny on tax returns and positions taken by individuals and businesses. The government has directed these funds to not increase audit rates on households with under $400,000 of income. But what about business tax returns? What if you are over that $400,000? There is a very high likelihood that the new war chest of funds is used to release a whole new batch of audits on unwitting taxpayers.
While this isn’t great news, and the last thing you need is the IRS knocking at your door, the best and only thing you can do is be prepared. Ensure your bookkeeping is on point, the tax positions taken meet the letter of the law and are documented properly, and you file the appropriate forms at the applicable deadlines set forth by the IRS. Planning in advance – to both decrease your tax position, in a completely legal and well-documented way, and to create a workplan to ensure compliance, is more important than ever.
