May 27, 2021
Over the past several years, the Internal Revenue Service (IRS) has struggled with its audit process. Hamstrung by tight budgets and not enough staff, the agency hasn’t had the requisite resources to audit as many taxpayers and businesses as it might otherwise.
However, a new plan Democrats recently proposed could change that. And in the coming years, if the Democrats can succeed, we could see a significant uptick in IRS audit activity.
Earlier this month, Democrat congresspeople said they plan to raise billions of dollars in cash to increase funding to the IRS. The funding, which would be used to increase IRS staffing levels and add resources to aid the agency in its efforts, could top billions of dollars.
The Biden administration is leading the effort and says increasing IRS funding could generate $700 billion in new revenue by increasing audit activity. The estimate, which may or may not prove accurate, also includes proposed changes to reporting that would expand the information taxpayers need to share with the IRS about their income. The CBO said last year that even a $40 billion increase in funding over the next decade could generate $63 billion in tax revenue over the same period.
If the IRS receives the funding, taxpayers of all types should expect an increase in inquiries and expanded audit activity. That, in turn, could prompt new tax bills, with interest and penalties, if taxpayers are found to be in violation of any tax rules.
As always, taxpayers should be saving their tax records and ensuring they’re properly filed to reference in the event of an audit. Often, the IRS simply asks for clarification or proof of certain transactions, including charitable giving or business expenses. In cases of a full audit, having papers ready and easy for the IRS to reference can expedite the process.
But it’s important to keep in mind that the Democrats’ plan may never come to fruition — and auditing taxpayers won’t happen right away.
For one, Republicans have expressed a desire to limit additional IRS funding. While that doesn’t necessarily mean the funding won’t be secured, it’s possible it could be lower than Democrats want.
Even if the IRS gets new funding, the changes that brings about may not take effect right away. Indeed, it takes years to hire auditors and then train them on IRS software and processes. Only after that is done can auditors start auditing taxpayers. In other words, even if IRS receives additional funding, taxpayers may not feel the auditing effects until much later.
Still, it’s important to be and stay prepared. Contact a Perlson LLP professional now at 516-541-0022 to discuss your unique tax situation and how we can help you in your audit process.