While the IRS plays an important role in helping the country meet its budgetary needs by collecting taxes, most people don’t enjoy giving their money to Uncle Sam. Some also fear the power of the IRS, especially when it comes to audits since they want to avoid incurring stiff penalties for simple mistakes on their tax return.
Recently, the IRS received a significant boost in funding that has made many self-employed workers wonder what they should watch out for moving forward.
What’s Happening
With the passage of the Inflation Reduction Act in August 2022, Congress authorized roughly $80 billion in funding for the IRS to help the agency with its tax collection efforts. In April of this year, the agency announced its plans to use that money. The IRS outlined a few specific priorities for allocating its funds.
Closing the Tax Gap
One key priority for the IRS is to close the tax gap. Each year, the agency has an estimate of the money that it should receive in tax payments. However, it consistently receives far less than it should due to improper filing and tax evasion.
Estimates show that the tax gap is about $600 billion annually, with the top 1% of Americans paying as much as $163 billion less than is owed.
Of note for self-employed earners, the last time the tax gap was definitively measured was between 2014 and 2016. During that time, 30% of uncollected taxes were from individual businesses, such as partnerships, LLCs and S Corps. The IRS plans to use its new funding to reduce the size of this gap, giving the government more funds to use each year.
Reducing Tax Evasion
Treasury Secretary Janet Yellen has indicated that the IRS plans to fight tax evasion through new enforcement and audit initiatives at the agency. However, she’s ordered the IRS not to increase the audit rate for taxpayers earning less than $400,000 annually. Instead, the enforcement efforts will focus on earners who make up the top 1% to 2% of households in the U.S.
IRS commissioner Danny Werfel noted, “During this time, the audit rate for average taxpayers will not be increasing and as a result we will not come close to hitting or exceeding any historic average rate. People who get W2s or Social Security payments or have a small business should not be worried about some new wave of IRS audits.”
Improving Technology
The IRS also plans to put its new funding toward improving technology. This tech investment will have both internal and external uses.
For example, it will offer tools that taxpayers can use to quickly identify mistakes on their returns before filing, helping them avoid costly errors or mistakes that could lead to having to file corrected returns.
Internal upgrades will include centralized databases with powerful data and analytics capabilities to help the IRS ensure compliance with the tax code.
Hiring Additional Staff
Much of the new funding will go toward a hiring spree as the IRS tries to increase its depleted headcount. Current IRS staffing levels are roughly 20% lower than they were in 2010 despite the rising population of American taxpayers.
The IRS has already hired over 5,000 service representatives using the money and plans to hire an additional 7,000 representatives and 1,500 auditors.
What Does This Mean for Self-Employed People?
How will all this new money for the IRS impact you if you are self-employed?
Many people are worried about a more powerful IRS auditing everyone in the country, but the truth is that the additional funding is only a good thing for most people.
The IRS claims that with the funding it received last summer, it hired 5,000 people to take phone calls and had already answered more than one million calls from taxpayers needing help with their taxes.
This improved service only benefits taxpayers. The same is true for new tools such as the planned technology services that can help taxpayers avoid mistakes and find errors in their returns before sending them to the IRS.
Beyond that, the IRS has hired more auditors and plans to close the tax gap. Part of this will come through an increased audit rate. This might be concerning for self-employed people, especially since recent tax gap analyses showed that a large portion of unpaid taxes came from S Corps, LLCs and partnerships.
However, Treasury Secretary Yellen has ordered the IRS to avoid increasing the audit rate on those earning less than $400,000. The commissioner of the IRS claims that small business owners don’t need to fear a wave of audits.
What Should You Do?
Since the IRS plans to use the money to improve its services and focus on collecting what it’s owed from wealthy individuals, there isn’t much you need to do in response. You won’t see many differences in how the IRS operates.
That said, this is a good reminder that small business owners should stay on top of their finances, regardless of if they’re earning more than $400,000 a year. Proper bookkeeping and compliance are essential for staying on the IRS’s good side and tracking your company’s financial success.
If you don’t have the time or expertise to manage your bookkeeping and compliance on your own, consider outsourcing this work to a service like Collective. We help self-employed businesses set up their LLC and S Corp, manage their monthly bookkeeping and file their annual taxes.
Final Word
While many people view the IRS as a financial bogeyman, the reality is that it will use most of its new funding to improve services for taxpayers who need help. Its recent enforcement efforts will primarily focus on top earners, so most small business owners and self-employed workers have little to worry about.
However, that doesn’t mean you can ignore your company’s need for accurate bookkeeping and compliance. Use this news as a reminder to be diligent about recordkeeping for your business.
