Are you prepared in the event of an audit? As a result of the Covid-19 Crisis and the multi-trillion-dollar fiscal policy challenges that ensued, the federal government is actively looking for ways to boost revenue.
President Joe Biden is currently proposing an additional $80 Billion dollars in IRS funding to help crackdown on tax evasion and bolster audit teams.
The additional injection of funds and upgrades accompany a slew of new disclosure requirements for people who own businesses that are not set up as corporations (e.g. real estate partnerships, law firms, etc).
The proposal seeks to boost enforcement by providing funds for staffing, reporting measures, and technology that could bring approximately $700 Billion in additional tax revenue. While the plan was initially framed as an equity play to collect from the ultra-wealthy and large corporations, some experts say small businesses may feel the impact.
According to De Lon Harris, the IRS deputy commissioner of examination for small businesses, the IRS is planning for 50% more audits than they have conducted in the previous year.
He also stated, “The IRS is focusing our efforts to increase compliance activity in this area of not only partnerships but also investor returns related to pass-throughs,”.
Who would be targeted?
“Small Business” can mean anything from your local “mom and pop shop”, to midsize silicon valley startups. According to Laura Davis from Accounting Today:
“Pass-through entities, which include partnerships, limited liability companies, and sole-proprietorships, are incredibly difficult for the IRS to audit because they frequently have complex structures that can involve dozens of inter-related entities. Pass-throughs don’t pay taxes themselves, but “pass” along with the profits and tax liabilities to investors — who then pay the taxes on their individual returns.”
Individual business owners who earn $400,000 or more per year (regardless of what they report on their tax forms) will be targeted for audit by the IRS.
This initiative comes after audits of corporate tax filings fell by 37% and individual return audits by 46% respectively, according to the congressional budget office. This fact, coupled with unprecedented government spending, has led the IRS to take action.
In February of 2021, the IRS hired 50 expert specialists to assist in taking on this task. This is the start of a new hire program that will continue as funds are released. The analyst can review returns up to three years old, and If a problem is found within the selected time period, they are allowed to go further back and examine returns that are even older.
What does this mean for you?
While the proposal is aimed at “high-earners”, history shows us that small businesses may bear most of the brunt in the long term.
Larger corporations and the ultra-wealthy have large legal teams and the capital to fight back when audited. Unfortunately, smaller businesses do not have that luxury. However, if you ensure that your financials are in order, taxes are up to date, and have a strategic tax plan… you can sleep soundly without worry.
This means being organized has never been more important.
Whether you’re a small business or a large corporation, all owners should take note and proceed with caution. This is the time to be reviewing your financials, record-keeping systems, and audit practices. If you do not have recordkeeping systems in place, this is the time to make that happen.
Book a call with one of our experts today and create a financial organization plan that works for your business.