Is the IRS expanding to generate more audits?

When the Inflation Reduction Act injected $80 billion into the Internal Revenue Service budget, the reaction was predictable. Polarized entities in politics and the media waxed hyperbolic about all the good or bad things that were to come for the American taxpayer.

Almost two years in, the story doesn’t sell soap anymore, and few are talking about it. That makes this a perfect time to see what changes have affected small and medium business owners without sifting through all the political rhetoric.

Let’s go!

A quick history

The Inflation Reduction Act, or IRA, was signed into law on August 16, 2022, but debate around it, and specifically the spending it promised the IRS, raged on and off Capitol Hill for months.

Rumors and suppositions on both sides of the political divide were the order of the day.

Democratic leadership insisted the $80 billion packages, parsed out over ten years, would restore taxpayer faith in the IRS by allowing it to pursue wealthy tax evaders and provide better service.

Republican leaders said the IRA would create an army of IRS auditors hell-bent on squeezing John Q. Public’s already withered pocketbook.

Both sides dug in deep, with the Democrats constructing efforts to build the IRS while the Republicans fought to stop funding.

Most of this was political grandstanding.

But why was the expansion granted in the first place?

Attrition

Currently, nearly a fifth of the IRS workforce is eligible for immediate retirement. Another 37% of IRS employees will be eligible in the next five years.

That equals a potential loss of 45% of the IRS workforce. IRS leadership has said multiple times that the money is needed to not only replace workers but also streamline a hiring process that causes many potential applicants to avoid the agency.

Lousy Service and unfair audit practices

One thing most American taxpayers agree on is that IRS customer service is terrible.

The IRS knows it, too. That’s why leadership is seeking improvement by automating services and changing the culture to be more customer-centric.

They also want to start targeting those making over $400,000 per year, large corporations, and complex business entities. In recent years, audits have focused on lower and middle-income taxpayers who make mistakes on returns or underpay by small amounts.

That’s because those audits are easier and cheaper for the IRS to conduct, reducing resource demand.

IRS leadership insisted the IRA cash infusion would allow them to shift their focus from blue-collar workers to white-collar tax evaders.

Now, the million-dollar question.

What does it all mean for your business?

So far, all the changes mean little unless you generate more than $400,000 in personal income per year, run a corporation, or engage in intricate financial machinations.

The one thing you may notice is a slight bump in customer service, but certainly nothing earth-shattering.

The IRS is touting a long line of wins against tax evaders and hyping improvements to customer service both online and in person.

But all the political speak of taxpayer heaven and hell leading up to the change has not materialized.

The Bottom Line

In reality, the changes promised by the IRS are moving at the speed of the government.

So, unless you are wealthy or actively engaged in tax fraud, your chances of a business tax audit are the same as they were two years ago.

But it’s always good to keep watching. Just because the media has fallen asleep on this one doesn’t mean you should.

If the promised culture change and customer service materialize, it could be a boon for your business.

Alternatively, they could always change strategies and use their resources to double down on small to medium-sized businesses.

As always, the best strategy is to stay vigilant and be prepared for potential audits.