President Biden recently announced that his administration is seeking $80 billion to beef up IRS enforcement. It is hoped that this move will provide the Administration with $700 billion in additional revenue over the next 10 years—paying for national plans like COVID relief and infrastructure improvement.
It is also expected that the move will address the tax gap (the difference between what taxpayers owe and what they actually pay) and will target individuals and corporations who evade federal taxes.
What Do Increased IRS Audits Mean for You?
One move we can expect from the Biden Administration’s plan is an increase in IRS audits. In an audit, IRS accountants review a taxpayer’s return to ensure that income is correctly reported. Discrepancies discovered during an audit can lead to increased tax obligations, fines and penalties for unreported income or late filing, and in some cases criminal charges (as when a taxpayer is found to have willfully deceived the IRS). The anticipated increase in audits will likely result in more individuals and corporations being called in for an audit of their returns.
Which Taxpayers Are Most at Risk for an IRS Audit?
As the IRS seeks to ramp up its collection efforts, some taxpayers may find themselves under greater scrutiny than others. Here are some groups the IRS will likely target in its revenue-raising efforts:
- Tax Cuts and Jobs Act (TCJA) Audits. The IRS has already begun to focus on taxpayer’s compliance with the TCJA. Through its Large Business & International division, the IRS is seeking to insure compliance and conducting exams for those taxpayer groups that have a higher potential for significant compliance risk. Because of the overlap with varying state laws related to timing and compliance, these audits will be particularly difficult for multi-state businesses.
- High-net-worth individuals. The Biden Administration has already targeted the wealthiest Americans with tax increases, including an increase in the top marginal income tax rate. Stricter IRS enforcement will likely result in more audits and closer scrutiny for taxpayers in the top 1% of earners, as well as those with significant investments in securities.
- Individuals who invest/speculate in cryptocurrency. Cryptocurrencies have upended the way we look at investment, and they’ve also created a somewhat elusive shadow economy where exchanges and individuals don’t always track and record transactions (and earnings) honestly. Biden’s plan will give the IRS more power to investigate and audit those who invest in cryptocurrency to ensure that all income earned through crypto is properly declared.
- Pass-through entities. Some small businesses may find themselves the focus of unwanted attention from the IRS as well. Pass-through entities (partnerships, LLCs, and C-Corps) are also likely to see an increase in audits as the Biden plan ramps up.
- Cash Only Businesses. It’s expected that the increased IRS scrutiny will also fall upon businesses that do many of their transactions in cash. Cash only businesses have long been difficult for the IRS to track, and their true income hard to assess. It’s expected that the IRS will now have the manpower and resources to pursue audits against more of these small businesses.
Are You at Risk for an Audit?
There are some objective factors that may put you at higher risk for experiencing an IRS audit. Here’s a quick checklist.
- Do you earn over $200,000 annually?
- Have you failed to report past income on your return?
- Have you claimed more itemized deductions than allowed?
- Do you operate a business?
- Did you claim rental losses on your return?
- Did you take a home office deduction?
- Did you claim gambling losses on your return?
- Do you hold a foreign bank account or earn income from a foreign source?
While none of these factors ensures that you will be audited, they do help create a picture of the type of taxpayer that may draw additional IRS scrutiny.
Need Tax Help? Ask a Professional
If you’re being audited or have any other tax problem, you don’t have to go it alone. Work with a seasoned professional who understands the nuances of tax laws and IRS regulations. Don’t risk increasing your tax burden with fines and penalties. At Moskowitz LLP, we’ve built our reputation assisting taxpayers like yourself. Our trained tax pros and attorneys can help you ensure that you follow the law but pay only the tax you owe. We’re here to help. Contact us today!