What you Should Understand About the IRS’ New Direction and What it Means For your Taxes
The IRS has the Inflation Reduction Act to thank for its newly enacted $80 billion in funding. The funding will go a long way to help the agency implement tax reforms and ensure more transparency in taxes. These reforms are part of the IRS’ touted improved approach to taxes, which will affect different taxpayers separately.
Below, we will discuss a few tax reforms to expect, now that the IRS has more money to spend on its systems. We will also include what it means for affected taxpayers.
Increased scrutiny.
According to Treasury Secretary, Janet Yellen, the IRS will now have money to enforce tax laws for “high net-worth individuals, large corporations and complex partnerships who today pay far less than they owe.”
However, as a tax practitioner for years, I would like to warn you. Do not relax, thinking that the improved systems, enforcements, and audits are all directed at the big businesses. Whether you run a small business or are an individual taxpayer, you all pay taxes. The government also wants your money.
In fact, the Tax Foundation says that 41% of tax revenue is from individuals. Corporate taxes only account for 5.1% based on 2020 data. Therefore, the IRS would not just want to ignore its biggest tax revenue base in pursuit of big businesses. Of course, they will want the big businesses’ money, but they will also want yours too.
Overhauling the IRS’ Technology
This is also another step the IRS is taking to improve how it handles your tax data. Remember, I have spoken about how the IRS matches information returns using its Information Returns Processing (IRP) System. Well, this has been technology at play, which mostly resulted in taxpayers receiving notices.
These notices served as a summon for taxpayers to provide further information about their tax returns. It also usually resulted in an audit and possible penalties for the taxpayers. Now, the crucial point to remember is that this also affected several individual taxpayers.
With this new intention of overhauling this and other IRS systems, expect more scrutiny directed at all taxpayers. Again, this quashes statements alleging that the IRS is only going to be targeting big businesses.
Remember, big businesses have already been hit with the minimum 15% tax rate and the 1% tax on all share buybacks (if listed). Given their structures, and listing requirements, they will not always evade taxes. Big businesses avoid paying taxes legally by using tax professionals like myself.
But right now, the mandated minimum of 15% tax will result in businesses paying their fair share. And here is how it will work:
The 15% minimum tax rate.
Corporations that make at least a billion dollars in income would be required to calculate their annual tax liability in two ways. The first one uses common tax accounting methods. This is 21% of (profits minus deductions and credits).
The second method is by applying the 15% minimum tax rate to the earnings they report to shareholders on their financial statements. These earnings are commonly known as book income. As such, whichever amount is greater becomes what the company owes. So, already, big businesses will not pay taxes under 15%.
After reading the above, you can already see that many big corporations will pay what can make the IRS happy. This is because of this good example of business tax savings before the new law. In 2020, Amazon recorded record profits but only had an effective federal income tax rate of just 9.4%. This was less than half the 21% corporate tax rate.
But with this new law, Amazon would have been pushed to an effective 15% tax rate, giving the IRS 5.6% more!
So, this proves the IRS will be happy with businesses. This means new technology will be coming down hard on individual taxpayers. It will even be harsher for some taxpayers who hid side hustle income or those owning more than one business.
Therefore, this is the time to stop living the dream that the IRS only targets big companies when they have already hit them with legislation. They are targeting you, the medium-income earners who trade crypto, run a side hustle, or own more than one small business.
Clearing backlogs, improving service
Finally, we close on a brighter note. The new IRS funding is also going to be used to employ more agents. This drive also targets about 50,000 IRS workers who are expected to retire over the next five years.
The IRS is using the above to ensure that taxpayers do not have to go through another round of frustrations caused by return-processing backlogs as experienced recently.
Backlogs are frustrating because it is not easy to think about two tax returns in the same year. That is what happened with some taxpayers who were still waiting for the results of their 2020 returns (filed in 2021) while they were filing their 2021 returns. More so, taxpayers had to wait longer for their refunds because their returns were still unprocessed. Therefore, this is a welcome move that helps remove taxpayer anxiety and ensures that when taxpayers call the agency, someone responds within reasonable timeframes.
Are you struggling to deal with your taxes? Don’t try to solve this problem on your own. It may result in IRS audits, which can be messy. You better hire me to start planning and preparing your taxes now. I always make tax problems go away. Contact me now.
Frequently Asked Questions
- What does tax reform mean?
This entails the improvement of the tax system to achieve a number of goals. These include efficiency, accuracy, and maximum benefit for the Treasury Department and the country at large through social and economic benefits.
- Is there a need for tax reform?
Yes, every country needs to keep reforming its tax systems. This should be in line with growing technology, which is leading to some cunning individuals and companies trying to use it to illegally evade taxes. In other words, the government should keep matching technologies that corporates use in order to efficiently enforce tax laws.
More so, tax reform can be done to achieve equality in taxation. As such, more economic groups in need could mean more tax reforms aimed at them – to help them pay less and claim specific deductions and credits.
- What are tax reforms examples?
Tax reforms can be placed in two broad categories. The first one is individual income tax reforms, and the second is corporate income tax reforms. A corporate tax reform example includes the recent 15% minimum tax rate. This reform aims to make businesses pay more taxes because the government felt they were “cheating” the tax system.
On the other hand, an example of individual tax reform could be removing payroll taxes for everyone making $75,000, as an example. Such a move could be aimed at improving the lives of affected individuals. So, this will be aimed at social and economic improvement.
- What is the impact of tax reform?
A tax reform has a negative and positive impact. On the negative side, businesses and individuals with increased taxes will lose income and profits. But the government gains more revenue, which is a positive impact. Another positive impact is that, when the government has more money, it can easily implement social programs that benefit the poor.
