Recent legislation aimed at addressing inflation concerns has empowered the government with a resolute Internal Revenue Service (IRS), granting them one of the most potent tools for tax enforcement. As a result, Congress is set to make the 2022 tax year the most profitable in American history, while the IRS now possesses ample funding to pursue every asset and dollar.
This year, we all face an increased risk of audits. With a tightening of collections enforcement and a larger workforce dedicated to audits, taxpayers across all income brackets should be concerned. To safeguard your interests, it is crucial to understand the implications to navigate these circumstances.
Record Taxes Collected as IRS Receives Additional Funding
The Inflation Reduction Act has provided a much-needed financial boost to the IRS, allowing them to return to pre-2010 audit rates and implement stricter collections enforcement. Taxpayers at all income levels will be targeted as the federal government anticipates collecting record taxes. The U.S. Department of the Treasury reports that tax collections for the fiscal year 2022 surpassed $4.4 trillion, up from $4 trillion the previous year. The Tax Foundation notes the following increases in tax collections across various categories:
Individual income taxes: 32 percent
Corporate taxes: 17 percent
Payroll taxes: 14 percent
With an additional $78 billion over the next decade, the IRS aims to hire tens of thousands of IT technicians, support staff, and experienced auditors to crack down on corporate and high-income tax evaders. Although IRS Commissioner Charles Rettig assures that funding will not focus on increasing scrutiny for small businesses or middle-income Americans, concerns are mounting.
Tax Implications of the Inflation Reduction Act: How Anti-Inflation Measures Affect Taxpayers
In addition to providing substantial funding to the IRS, the Inflation Reduction Act seeks to prevent businesses from evading corporate taxes. This is achieved through the introduction of a 15 percent corporate minimum tax rate, which applies to multinational corporations with annual profits exceeding $890 million. Specifically, this rate considers corporations' publicly available "book profits," which are often higher than what is reported to the government. If the total paid tax rate falls below 15 percent, businesses are required to pay additional taxes until their effective worldwide rate reaches the benchmark. While there are exceptions, this new rule aims to prevent large corporations from evading significant tax payments.
While the new corporate minimum tax may have limited implications for everyday taxpayers, the increased funding could have far-reaching effects. While improved IRS support services may alleviate some challenges in reaching the agency, there is no guarantee of reduced wait times. One area where the influx of resources will have a notable impact is in audits.
A Surge in Funding for IRS Auditing: Anticipating Future Audit Rates
Audit rates have been increasing rapidly for taxpayers with higher incomes. According to a recent IRS statement, there has already been a significant rise in audit rates for individuals earning over $10 million annually. The new audit rate for this income bracket exceeds eight percent, as higher-income taxpayers experienced the sharpest decline in audit rates prior to 2022. The Treasury Inspector General for Tax Administration reveals that between 2015 and 2019, audit rates dropped by 75 percent for taxpayers earning over $1 million per year.
The U.S. Government Accountability Office (GAO) states that since 2010, audit rates have seen the most significant decrease for taxpayers with incomes of $200,000 and above. As audits on higher-income individuals require more resources and support, lower-income audits, which are typically automated, have remained relatively stable. However, higher-income taxpayers are apprehensive as the IRS, emboldened by its renewed resources, plans to conduct the largest number
The Importance of Taking Proactive Measures in Response to Increased IRS Scrutiny
As the IRS intensifies its collection efforts, it is crucial to adopt a proactive approach towards tax debt. Previously, ordinary taxpayers may have felt a sense of security, assuming that the agency primarily targeted high-income individuals. However, it is important to recognize that aggressive collection actions can be directed towards anyone. For instance, taxpayers with assets overseas are often surprised to learn that these resources are just as susceptible to IRS scrutiny as domestic assets. A recent memorandum from the IRS Office of Chief Counsel confirms the agency's authority to share taxpayers' tax information with federal agencies, foreign governments, and third parties such as banks and employers.
While foreign assets and holdings abroad may impact only a few individuals, it is essential for taxpayers across all income brackets to be more mindful. The government has renewed its commitment to ensure accurate reporting of all incomes, leaving no room for underreporting.
Given the rising enforcement of IRS collections and audit rates, it is never too early to prepare. If you encounter difficulties in resolving IRS issues, feel free to contact us directly at 404-981-7660. We are here to assist you.
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