President Joe Biden recently signed the Inflation Reduction Act (IRA) into law. Along with the goals of creating jobs, reducing pollution, and cutting Medicare costs, the IRA adds nearly $80 billion to the budget of the IRS over the next 10 years.
Half of that budget will be spent on tax enforcement, which has raised concerns that more Americans might be audited in the coming tax season.
Following is an explanation of how the IRS might impact your life, as well as some tips on filing taxes correctly to reduce your risk of an audit and lower your financial stress levels.
How does the Inflation Reduction Act affect the IRS?
The IRA aims to combat inflation and reduce financial strain on regular Americans. Primarily, it focuses on economic measures such as cutting Medicare expenses, creating new jobs in the clean-energy sector, and putting the country on a path to environmental sustainability.
But the act also dedicates additional funding to the IRS. While some of the agency’s new funding will go toward hiring IRS agents, the budget — which will be doled out to the agency over the course of 10 years — breaks down into the following categories:
- $15 million for a task force dedicated to potentially developing a free tax e-filing program
- $3.2 billion for taxpayer services (public education, filing assistance, tax-return processing, over-the-phone assistance)
- $4.8 billion to invest in improving IRS information technology systems, including customer service technology
- $25.3 billion to support day-to-day IRS operations, such as rent, telecommunications, facility updates, printing, and general security
- $45.6 billion for tax enforcement, which could include hiring more agents, improving secure IT infrastructures, and enforcing cryptocurrency taxation
The Congressional Budget Office estimates the additional funding should help the IRS collect $124 billion in the next 10 years solely from taxes owed to the government. The White House estimates the richest 1% of Americans “evade” $160 billion per year in taxes.
Will the new IRS budget include adding more IRS agents?
You might have heard that the IRS will hire almost 90,000 new IRS agents to perform more frequent audits.
However, while the increased budget will allow the IRS to hire up to 87,000 employees between now and 2031, most of these positions will not be newly created roles.
Instead, most of the new IRS employees will be hired to fill positions left open by IRS employees who will reach retirement age in the next five years.
Between 20,000 and 30,000 truly new jobs will be created, bringing the total number of IRS employees back up to the 100,000 employees it had a decade ago.
How will increased funding impact the average American?
Hypothetically, the increased number of IRS employees will make tax filing easier for the average American, not harder.
Why? Because the IRS has been severely understaffed since 2010, a problem that only worsened during the COVID-19 epidemic. Last year, for instance, the IRS was only able to answer 19% of all the phone calls it received, down from answering 59% of all calls in 2019.
Compounding the problem, the IRS still relies on technology that dates back to the 1960s to process tax returns. So, if you’ve ever experienced a delay on receiving your return, there are more than a few reasons why.
Hopefully, the gradual rollout of more employees will ensure your tax return is processed quicker and more efficiently in the years to come.
How can you reduce your risk of an audit?
With an increase in IRS resources, many Americans are worried there’s a greater likelihood that they’ll be audited in future years..
According to both the White House and the IRS, the average American has little to worry about. Charles Rettig, current IRS commissioner, has said additional IRS agents will focus on preventing tax fraud among the richest Americans and most profitable companies.
Rettig also emphasized that small businesses, middle-income Americans, and low-income Americans will not be at an increased risk of an audit.
Time will tell if the IRS keeps its word. In the meantime, here are a few ways you can reduce your risk of being audited.
Report your income correctly
If you earned a few hundred dollars from a handful of different side gigs, it can be tempting to leave the extra revenue off your 1040. But legally, you are required to report that income. And with the IRS, it’s always wise to err on the safe side.
So, report all your income for every job, no matter how large or small. Otherwise, the IRS might notice that an employer has reported paying you during the tax year, but that you haven’t reported receiving any money from the job.
Calculate your tax deductions precisely
Tax deductions help individuals and businesses reduce their overall taxable income, but it’s important not to guess on your deduction amount. You need to accurately tally the amount of each deduction to the decimal, and you should be prepared to back up your calculations with receipts.
Round numbers, especially when it comes to things like gas mileage deductions, can be a warning sign to the IRS you aren’t reporting your income correctly. Make sure to be as precise as possible when reporting both income and tax deductions.
File with an accountant
The best way to avoid an audit? Work with a tax professional. No matter how good you are at math, a CPA is likely better — or at least better at combing your financial records and verifying that you’re adhering to tax code.
Paying an accountant to file your tax return is often more expensive than filing with tax software. If you need to strike a middle ground between ensuring accuracy and sticking to your budget, many tax-filing software providers let you add on audit protection for an additional fee.
Usually, these plans mean that if the IRS comes after you, your tax software provider will help represent you in an audit.
The bottom line
The influx of funding to the IRS shouldn’t fill you with panic. Hopefully, a better-funded IRS will result in making it easier to file tax returns, access the IRS’s customer service team, and (hopefully) get your tax refund a little faster.
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