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IRS funding
Biden’s proposal comes as the IRS struggles with the volume and complexity of returns.
The agency lost more than 33,378 employees between 2010 and 2020, including those auditing returns and collecting unpaid taxes.
These cuts have resulted in fewer audits for high-earning filers. The IRS audited fewer than 2 out of every 100 taxpayers earning more than $1 million in 2020, a Syracuse University report found.
While the number of millionaires have nearly doubled since 2012, tax audits have dropped by 72%, to 11,331 in 2020, from 40,965 in 2012.
The funding dip has impacted more than just the wealthy, however.
A recent National Taxpayer Advocate report found the IRS answers only 24% of calls, making it difficult for those grappling with the slew of tax changes amid the pandemic.
Advocates say Biden’s proposal may help pay for his $1.8 trillion American Families Plan, while opponents argue it may place burdens on small businesses without guaranteeing the promised tax revenue.
CNBC has reached out to the IRS for comment.
Impacted small businesses
The plan may result in more audits for some small businesses, particularly high earners, according to financial experts.
“If you’re an individual making over $400,000 a year, you should feel like you have a target on your back,” said Paul Axberg, a certified financial planner and CPA at Axberg Wealth Management in Sun City West, Arizona.
Cash-only businesses
Certain small businesses may face an audit under the plan.
“I think the industries that should be concerned are those in cash,” said Luis Strohmeier, a Miami-based CFP and partner at Octavia Wealth Advisors.
He expects the agency to scrutinize cash-only small businesses like restaurants, retail, salons and other service-based companies.
“I think going after mom and pops, where the agent goes to see them, and they have all their receipts in a shoebox, just might yield something,” said Strohmeier.
He said those with looser record-keeping should take the opportunity to clean up their books.
Make sure you get your books audited by your accounting firm and that everything matches up, just in case somebody knocks on your door.
Luis Strohmeier
partner at Octavia Wealth Advisors
Passing a tax audit
Getting the call for an audit may be nerve-racking for small businesses. But those following the rules shouldn’t be afraid of run-ins with Uncle Sam, financial experts say.
“It’s always about having good record-keeping,” Axberg said.
He said it’s critical to save receipts for all expenses and keep books up-to-date. It will be easier for a CPA to back up your position with pristine records in the event of an audit.
While the less costly do-it-yourself approach may be tempting, Strohmeier urges against it.
“Make sure you get your books audited by your accounting firm and that everything matches up, just in case somebody knocks on your door,” he said.
Tax audits usually last for three years. But once the agency observes a small business with organized paperwork, matching and up-to-date records, they will typically leave you alone, Strohmeier said.
Still, the proposal isn’t final, and any affected businesses have time to prepare.
“I think they should just be aware that there’s gonna be a higher odds of getting an audit,” Axberg said.
Source : CNBC
