The $80 billion that the Internal Revenue Service is getting in additional funds over the next 10 years will be devoted to upgrades for IRS operations, additional hiring initiatives as well as enforcement.
The extra cash — almost six times the IRS’s annual $13.8 billion budget — will target much wealthier taxpayers and corporations through increased audits.
But what exactly does it mean for the average taxpayer?
The answer is not exactly clear right now as we await a detailed spending plan from the agency in the coming weeks.
For now, we wanted to give you some idea of how the additional money will be spent and what you can do if you’re at risk of being audited.
How Will the IRS Use the Additional Money?
The new IRS funding will be appropriated as follows:
- $3,181,500,000 for taxpayer services
- $45,637,400,000 for enforcement
- $25,326,400,000 for operations support
- $4,750,700,000 for business systems modernization
The Biden administration plans to have the IRS phase in the new spending by implementing no more than $1.5 billion the first year and gradually building up to $15 billion by the 10th year.
As mentioned above, the IRS plans to use the funds to update its antiquated IT systems (some of which date back to the 1960s), as well as improving phone service and speeding up the processing of paper tax returns.
It plans to hire 5,000 additional phone representatives, fully staff every IRS Tax Assistance Center across the country, and improve the processing of paper returns by implementing scanning technology.
How Much Will the IRS Grow as a Result of this New Legislation?
Over the past decade, the IRS budget fell by 18.5 percent, leading to a 20 percent decline in the agency’s workforce.
As of 2021, the IRS had only 78,661 employees.
By comparison, it had 90,290 employees in 2012 and 116,673 in 1992.
According to experts, the IRS has fewer auditors today than at any time since World War II.
While some media outlets have said that the IRS will hire close to 87,000 new auditors, that’s an inaccurate number.
Additional staffers will be needed for sure to offset the approximate 35,000 IRS employees who are expected to retire in the next six years, along with an additional 17,000 who will leave before retirement.
Some experts believe the agency will need to hire around 8,600 new employees per year just to stay even over the next six years.
At the end of 10 years, the IRS may grow by 20,000 to 30,000 employees, but it will still be smaller than it was in 1992.
Will Audits Increase?
On most people’s minds, however, is the danger of being audited given that most of the money is intended for stepped-up enforcement to help the IRS collect the estimated $600 billion in taxes that go unpaid each year.
According to the House Ways and Means Committee watchdog group, IRS officials have admitted that there just isn’t enough personnel to begin audits of the middle class due to employee attrition and hiring challenges within the agency.
IRS officials have promised that it will not target families and small businesses making less than $400,000 a year. But that remains to be seen.
Audits will most likely rise for taxpayers earning more than $400,000 per year, however. But this may take some time, experts believe.
To be prepared, we advise that you keep complete and accurate records and file timely and complete tax returns.
Here are a some of the areas of concern that we see going forward.
Cryptocurrency
Expect increased IRS audits dealing with cryptocurrency transactions given the new wording on the draft Form 1040 for 2022 that asks the following question: “At any time during 2022, did you (a) receive (as a reward, award, or compensation) or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”
Tip: if you deal with cryptocurrency, be sure to keep good records and report any income you make.
S Corporation Compensation
For over 20 years, the IRS has been concerned with S corporations paying their shareholder-employees unreasonably low salaries. Even though it threatened to increase audits of S Corps, that never happened due to budget constraints.
If you’re an S Corp, be sure to have that S Corp pay you a reasonable salary and benefits, and then document how you arrived at the amount since the IRS will likely scrutinize this more closely from now on.
If the agency concludes that part of your corporate cash distribution is really a disguised salary payment as opposed to employee wages or bonus, you can expect to retroactively pay employment taxes, penalties, and interest.
Syndicated Conservation Easements
Something else that we believe the IRS will go after is what’s known as syndicated conservation easements.
These are real estate partnerships that acquire land and donate the development rights to a qualified organization.
Investors in such partnerships have been known to claim charitable deductions that are four times the amount of their investment.
In light of that, expect additional scrutiny on these types of deals.
Offshore Accounts
U.S. citizens and residents who put assets into foreign bank accounts are required to report that income to the U.S. Treasury.
If you have more than $10,000 in one or more offshore accounts, you must file a Report of Foreign Bank and Financial Account (FBAR) each year.
Failure to do so can result in substantial penalties: $100,000 or 50% of the total balance of the account per violation.
In recent years, the IRS has gone after both banks and bank account holders who hide assets in offshore accounts.
Expect the IRS to place even greater emphasis on identifying and tracking such offshore assets.
Business Partnerships
The partnership audit rate has been about 0.4 percent to 0.5 percent for many years and indeed, many partnerships have never been audited.
However, we believe that with the new IRS windfall, partnerships and multi-member LLCs taxed as partnerships will be under increased scrutiny in the future.
If you are concerned about being audited by the IRS, be sure to give us a call or email [email protected] to make an appointment.