The IRS is Set to Get $80 Billion in New Funding
What does increased IRS funding really mean for taxpayers and the self-employed?
New Budget Allocation
The Internal Revenue Service (IRS) is set to receive $80 billion over the next decade. Some of that money will be dedicated to updating old computer systems and improving customer service. At the same time, a bulk of the budget will be directed towards increased enforcement to help the IRS collect more of the estimated $600 billion in taxes that go unpaid each year.
This news has been making major headlines over the past couple of weeks, with each network offering its own (totally unbiased) narrative of the new bill and what this means for taxpayers. Will audits increase? Should small businesses or the self-employed be worried?
We sat down with Daniel Talbott, Senior Tax Consultant at Formations, to ask, “What’s really going on?”
Thanks for taking the time to chat with us, Daniel. Can you start by letting people know your background and role at Formations?
Sure, I’d love to. So at Formations, I’m a Senior Tax Consultant and an S-Corp specialist. In the past, I was self-employed and ran into my own tax and accounting problems. So to solve it, I decided to get into the business and go back to school to become a tax accountant. And, you know, I was passionate about helping people with the same issues I had. People that don’t know what taxes are, how to keep track of their books, or build good financials.
It’s a pleasure for me to join a company like Formations where we help small business owners all over the country not only understand their finances but also stay on top of their taxes and tax planning. So this is a dream come true.
Formations: That’s awesome. Well, we’re fortunate to have you. And we wanted to ask you about the new IRS updates. There have been hot debates over the new budget that was announced; what’s really going on with that?
Daniel: Over the last couple of years, the IRS has been through the wringer. The IRS is really easy to vilify, right? They’re coming after our money and taking our paychecks away in the form of taxes. So nobody likes the IRS.
I think people like the IRS even less than they like the dentist.
But after years of government shutdowns and short staffing during the pandemic, there’s a massive backlog within the IRS. And what we’re seeing now is talk of increasing the IRS budget so they can expand by about 87,000 different agents across different departments. And that’s really in response to that massive backlog that they have.
There are rooms full of tax returns. I’ve seen some pictures online of boxes and boxes of paper tax returns that cannot be processed. And they have to get caught up. It will be a compounding issue if they don’t get caught up. So that’s one of the major driving factors to this.
The second major factor is the CARES Act. The Cares Act was a law that was passed during the COVID-19 pandemic that enabled businesses to take out forgivable or partially forgivable loans. Part of this was the PPP loan you probably heard about in the news; this was a paycheck protection program. It was a loan you could use to fund your payroll that would be forgivable (you wouldn’t have to pay it back). So it was a huge benefit.
There was also the Small Business Associations Economic Impact Loan (EIDL), another forgivable, or very low-interest, loan that businesses had the opportunity to take.
However, some larger corporations and bigger businesses took massive loans through these programs, which depleted funds. And while many small businesses were saved because of these funds, some could not get loans because the funding was depleted so quickly. So whenever there are programs like this, it’s time to go back and ensure there are no bad actors, no fraud, and no ill-gotten proceeds from these programs.
And the final note is that over the last several years, the number of small businesses that have been audited has been low. Less than 1% of S-Corps are audited every year. And it’s been even fewer over the last couple of years. And while we love S-Corps and want to help all of our solo entrepreneurs take advantage of the S-Corp tax classification, some folks are taking advantage of it or maybe even unknowingly abusing the system.
The IRS knows, and they’ve been watching for a long time; they just didn’t have the personnel to do something about it. So that’s another big reason they want to ramp up and add to their personnel.
Formations: That’s great. There have just been so many stories, and it can be easy to be swept into different narratives. On that note, how do you think this budget will impact small businesses and the self-employed? What does this really mean for audits and some of these programs?
Audits will increase with 87,000 new IRS agents and with the fact that S-Corps have been audited at less than 1%. The IRS has needed to increase audits for years.
When you don’t increase the tax rate, one of the best ways to increase the income tax brought in through the IRS is to start auditing returns. So yes, unfortunately, audits will go up.
But “audit” doesn’t have to be a scary term or a scary situation. There are things that small business owners can do to prepare.
Formations: Yeah, that’s fantastic. Taxes are nuanced, and it’s essential to get them right. So leaning on professionals is important. That said, you are a member of different professional networks—what’s the professional tax community’s perspective?
Daniel: As a tax professional, I am an enrolled agent, which is a credential provided by the IRS, and I’m in a lot of EA and CPA groups. In these groups, we are having very different conversations than the news is having and what I’m chatting about at the dinner table with friends.
We are worried about business owners, especially those operating without guidance.
We are worried about social media tax advice that is sometimes just outright wrong.
Additionally, we’re very interested in what will happen to the industry by taking 87,000 professionals out of the private sector; it will shake things up. People are going to have to find new CPAs, new tax professionals, and new accountants—there are going to be workload shifts. So it will be interesting to see how that plays out, both in the industry and among business owners.
I’m confident that professionals in the tax community are ready for it. We’re prepared, and we know how to handle it. So talk to an advisor—if you don’t have one, find one—and start the conversation early.
Outside of those items, we’re pretty excited. We’re tired of having to tell our clients we don’t know when their return is going to be processed or when they’ll get their refund. It’s been really stressful over the last few years because the IRS is just so slow—with 87,000 new professionals, we’re excited for much faster response and processing times.
The IRS has already started hiring more customer service representatives and the promise of faster response times is encouraging. For many, this will make filing taxes less stressful.
But a word of advice for our small business owner and self-employed community: proceed with caution when operating without the guidance of a professional.
Don’t wait until tax season to talk about tax planning.
If you don’t know where to start, read our blog: How To Protect Yourself From An Audit.