The Inflation Reduction Act passed in the Senate on Aug. 7, in the House on Aug. 12, and was signed into law by President Biden on Aug. 16. The bill has many aspects to it, as it addresses inflation, tackles climate change, and provides some tax increases aimed at the ultra-wealthy.
While everyone has their opinion on the bill itself and how effective it will be on the myriad of issues it’s expected to cure, there is one provision I’d like to discuss: the $79.6 billion appropriated to the IRS through 2031 to bolster enforcement and taxpayer services.
AUDITS ON THE RISE
Anyone who has tried to get the IRS on the phone the past couple of years usually finds themselves on hold for an hour or two, only to be hung up on. So, if the bill cleans up this scenario by boosting taxpayer services, I’m all for it. However, only 4 percent of the entire appropriation will go to taxpayer services, meaning the substandard service on the phone likely will continue. But the amount of IRS audits will increase significantly.
Now look, I am not in favor of people cheating on their taxes and getting away with it. However, I have hundreds of clients who legitimately use the tax laws to minimize their annual tax bite. The problem is that these folks will get audited and likely come up with “no change” after having their businesses disrupted for long periods of time and paying their certified public accountants (CPAs) and tax attorneys thousands of dollars to defend themselves.
STEPS TO ENSURE COMPLIANCE
There has never been a more pivotal time to make sure you and your firm are in compliance. Based on my experience with tax audits for pest management professionals (PMPs), most accounts will be tested. But the auditor will look at the following seven items in-depth the most:
- Revenues — Essentially, the auditor will be looking for evidence that all your sales are properly recorded, through sales records that trace and agree to your bank statements.
- Employee compensation — Compensation must trace and agree to payroll records, including forms 941, 940, W-2 and W-3.
- Outside contractor’s expenses — If you use outside contractors, you will need to show invoices, checks issued and 1099 forms issued, as well as proof the subcontractors are in fact subcontractors and not W-2 employees. The 1099 vs. W-2 issue is subtle, but extremely important because if, in the auditor’s opinion, the subcontractor is in reality an employee, you may be subject to employment taxes.
- Professional fees — The auditor will again look for invoices, checks and 1099 forms issued for the same reason outlined in point No. 3, proving that you did, in fact, hire a professional rather than call someone on your staff a professional and pay them without remitting payroll taxes.
- Travel and meals — Keep calendars, diaries, appointment books and logs to document any legitimate expense, as this is one of the most abused deductions. Without such evidence, the auditor may disallow the entire deduction.
- Office expenses — Keep receipts, canceled checks and credit card statements to substantiate office expenses.
- Other miscellaneous expenses — For most companies, this is a dumping account for expenditures that cannot be categorized easily. If you have a miscellaneous expense account, make sure the items in it are legitimate deductible expenses.
While tax audits always have been a risk to businesspeople in the past, passage of the Inflation Reduction Act will increase the likelihood your number will come up for an audit. Having clean books is the best defensive measure you can take.