The Inflation Reduction Act of 2022 authorized major spending for a variety initiatives and drug price relief for Medicare recipients. But it also included the biggest boost in Internal Revenue Service funding in years, mostly to hire new agents for the chronically understaffed agency. That’s about $79 billion in additional IRS funding over 10 years.
That might scare some taxpayers into thinking that the IRS is coming after the little people with audits, but that’s not the case. In a letter to the Senate, IRS Commissioner Charles Rettig said: “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans.”
Much of the additional funds will go to upgrades of technology and having people available to provide taxpayer assistance, says Craig Richards, managing director and director of tax services at Fiduciary Trust International in New York. “Initially most of their spending is just having agents that are able to take taxpayers phone calls and cut down the wait times.”
More IRS audits down the line?
“It’s going to take a while to get these additional agents, and then presumably there’ll be more audits,” he says. “But it takes time to find the right people and to get them trained. And don’t forget, this is over 10 years.”
What type of audit?
Still, the question is, what should you do if you get a notice in the mail questioning their tax return? Some of it depends on the type of audit – whether you get a notice in the mail or are subjected to an actual field audit.
Field audits have gone down dramatically, said Richards. “The majority of taxpayers don’t get audited – .01% If you want to just talk about individuals and not entities. So, most audits happen through the mail.”
“The IRS is now coming out with a lot of computer-generated audits,” says Frank Corrado, managing director of Robertson Stevens in San Francisco. “We find those that are pretty well addressed with any kind of correspondence back to the IRS. Anytime clients get letters, they get very worried.”
“However, we feel pretty comfortable and when we write letters back to the IRS nine times out of 10 the situation is resolved. So just because clients get a letter doesn’t mean that it’s something they’ve done wrong.”
What to do in an audit
Treasury Secretary Janet Yellen said the funding won’t target Americans and small businesses making less than $400,000. However, if the IRS contacts you for an audit, you should:
- Contact your accountant immediately. “If they had a CPA that prepare their return, they should obviously be reaching out to that CPA and working with them and figuring out what it is,” says Richards.
- Review your return and get your records together. Make sure you have copies of your W-2 or 1099. “Look at your return and say, well, as far as I know everything is complete and accurate,” Richards says. “Get records together. It might be something as simple as they want to look at your charitable contributions. Put together the checks that you sent, your receipt, those types of things. Gather the supporting information.”
- If you follow the rules, you will prevail. “We feel that the IRS code has rules for things, and if you follow the rules, whether it’s a red flag or not doesn’t really matter, because you will always prevail upon any kind of audit,” says Corrado. “The best thing is to have communication with clients up front as far as what the strategies you are taking and making sure they’re comfortable with the position you’re taking on the tax return. We’re a big believer that it is not illegal to try and reduce your tax liability.”
- Retirees fall into multiple categories of complexities. “Dependent upon what they have in their life will dictate if they should be doing it on their own and if they should get the help of someone else to prepare their tax return,” Richards says. “Generally, it is not a bad idea to get help in order to do your tax return. They can ensure that you are collecting the correct information for your tax return. They can also provide critical assistance in the even you are audited.”
“For retirees, regardless of what stage you are in, you need to have your taxes prepared in a way that would be upheld with any kind of scrutiny,” says Corrado. “It may sound trite, but the best way to avoid an audit is not to encourage one in the first place. As tax professionals, we are pretty well versed in the code, we know what’s allowed and what’s not allowed.”
Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.
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