Will You Be Targeted By The Inflation Reduction Act This Year? What You Need To Understand.
On August 16, 2022, President Biden signed the Inflation Reduction Act into the law, giving the IRS an additional $80 billion for audits and enforcement. The President and other political leaders promised that the new funding would only be used to go after the super-wealthy. However, the President’s promise ignores one key fact: the IRS does not know who is, and who is not wealthy until after the audit.
For example, assume a successful businessman makes $5 million per year but uses a tax shelter to only report $15,000. How does the IRS know that the $15,000 reported is wrong? The United States does not require people to report their wealth. Sure, the IRS can look to outside factors, type of car, size of house, etc. However, many people with little income live well (non-taxed inheritances, credit cards, etc.) and many wealthy people live frugal lives. As such, the only tool that the IRS has to know who is, and who is not, wealthy is the audit. Therefore, the IRS must audit normal taxpayers to identify super wealthy people who are hiding their wealth. In other words, every taxpayer is one computer algorithm, or one IRS judgment call away from being swept into the new $80 billion enforcement net.
Moreover, once the IRS begins the audit, federal law requires them to see it through to the end. This is especially problematic because, in the United States, taxpayers, not the IRS must prove the correct tax. As such, many small business owners who have high gross, but low total income will be forced to pay large amounts of tax if they do not have records proving all expenses. Similarly, otherwise normal taxpayers with a few foreign assets may face five or six figure penalties if they cannot prove compliance with the U.S.’s draconian foreign reporting requirements. People who deal in cryptographic currencies will face perhaps the greatest struggles due to the inherent difficulty of proving crytpo expenses and losses. As such, numerous taxpayers who are outside the intended scope of the new $80 billion enforcement net will nonetheless find their lives sidelined by the IRS as they spend years trying to prove their case.
The IRS will catch many thousands of ordinary Americans, along with a few super-wealthy Americans in its new $80 billion enforcement net. The best way to avoid being caught in the new enforcement push is to make sure you correct any existing tax issues and prepare your records in case of an audit. As such, anyone who suspects they may have any tax issues including but not limited to large business deductions, travel expenses, foreign assets, transaction tax, corporate reporting, and crypto expenses and losses should consult a qualified Enrolled Agent or Tax Lawyer to protect themselves from the oncoming flood of audits.