Congress and President Biden just handed the Internal Revenue Service an unprecedented war chest and marching orders to ramp up collections.
Tucked inside the Inflation Reduction Act is $80 billion in new funding for the IRS over the next 10 years. More than half of that money is slated for increased enforcement, including 87,000 new agents.
Proponents say this will raise government revenue by going after wealthy tax cheats. In reality, many law-abiding small business owners and high-net-worth individuals will find themselves the target of heavy-handed and costly audits.
How do we know this?
While both the bill and the current IRS commissioner have vowed not to go after anyone making less than $400,000 a year, when it comes to auditing business entities, that limitation is practically impossible. Since there are multiple owners in a partnership and frequently multiple owners in an S corporation, the IRS likely will go after these entities regardless of the income level. Already, the commissioner has said that the IRS plans to increase its compliance efforts on partnerships and there is strong evidence that many owners of S corporations may be misreporting their income.
The reality is when the president and commissioner say they won’t go after anyone making less than $400,000 a year, what they really mean is they won’t go after any wage earners making less than $400,000 on a W-2. Business owners don’t appear to be included in this limitation.
If Congress were honest, this bill would be called the Business Disruption Act. High net worth individuals, growth-minded entrepreneurs, and strategic investors need a plan for the IRS tsunami.
Here are three ways to protect yourself.
1. Get a CPA Who Isn’t Afraid of the IRS
The question isn’t will you get audited; it’s when.
We’ve been watching the IRS get more aggressive in how it approaches certain types of taxpayers for years. Rather than make an honest effort to root out actual tax cheats, the IRS has been challenging legitimate tax incentives with a heavy hand.
Take conservation easements, for example. For the past several years, virtually every property owner who has used a conservation easement has found themselves subject to an audit in which the IRS denies the deduction. The property owner’s only recourse is a costly and time-consuming court battle with the federal government. With more enforcement resources at its disposal, this approach will only get worse.
IRS auditors are the playground bullies of the tax world. You need a CPA who isn’t afraid to stand up to them. As the client, you should never, ever speak with the IRS. That’s what your CPA is for. If your tax advisor seems uncomfortable with this idea, that’s a clear sign that it’s time to make a change.
2. Make Sure Your CPA Is Preparing Your Tax Return in Ways That Minimize Your Chance of an Audit
While you may not be able to avoid an audit forever, there’s no reason to position yourself at the front of the pack. There are dozens, if not hundreds, of choices that your tax preparer makes in creating your return that will either raise or lower potential flags to the IRS. All of these choices are legal options, but the terminology and methodology make a difference.
Ask your CPA for specific examples of how they are reducing your risk of an IRS audit. You want someone who can give you a clear plan and who demonstrates a level of confidence that reassures you they can deliver.
This shouldn’t mean missing out on tax deductions to which you are entitled. Over the years, I’ve met with far too many new clients who told me they had been knowingly skipping certain deductions because they thought claiming them would increase their risk of an audit.
Missing out on tax incentives and deductions is like making a voluntary donation to Washington, D.C. No solid tax strategy makes this tradeoff. If your tax advisor is recommending this, see rule number one.
3. Invest in Education and Advice
Despite the IRS’s recent posturing, the government still has a long list of public policy priorities that it wants private enterprises to support. Job creation, technology development, renewable energy, affordable housing, insurance programs, food production, and retirement accounts. These are all areas where the government offers compelling tax incentives to encourage investment.
One of the keys to tapping into these incentives is ensuring you have the information and guidance you need to maximize your results. Take the time to learn how these programs work and, when needed, bring in an expert.
Incentives change frequently, so staying on top of the details is essential. The new legislation, for example, makes significant changes to solar energy tax credits. If you are considering installing a solar energy system for your property, be sure you are working with someone who knows that business inside and out. It’s not enough to have the right technology and equipment at the right price. You need to make sure you’re also structuring and documenting your purchase to maximize the available tax incentives.
With the IRS bearing down on small business owners, now is the time to surround yourself with high-powered professionals who will protect your interests.