The Post-IRA IRS
by Marty Kirshner, CPA, MSA & Joe Ciccarello, CPA, MST, Gray, Gray & Gray, LLP
What does a bulked up Internal Revenue Service mean for your energy business?
The recently enacted Inflation Reduction Act (IRA) included nearly $80 billion dollars of additional funding for the Internal Revenue Service (IRS), more than half of which is earmarked for enforcement. The remainder of the budget boost will go to operations, taxpayer services, technology updates, and development of a free e-file system.
The IRS says the new funding will allow it to hire 87,000 new agents to conduct audits that will target collections, with a focus on corporations and high net worth individuals. The Congressional Budget Office estimates these enhanced collection practices will generate an additional $203.7 billion in tax revenues in the next nine years.
IRS Commissioner Charles Rettig said there would be no increase in audits of households making less than $400,000 per year. “These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” Rettig wrote in a letter to the Senate.
Contrary to that claim, The Wall Street Journal, citing Congress’ Joint Committee on Taxation, predicts 78% to 90% of the money raised by collecting taxes on underreported income is likely to come from taxpayers making less than $200,000 per year while only 4% to 5% will come from those making more than $500,000.
Will S Corps Be Targeted?
With 87,000 new IRS agents in the field, there is a much higher chance of a tax audit for any business. The Wall Street Journal predicts that “a particular audit target will be ‘pass throughs’ including Subchapter S businesses that file under the individual tax code,” as well as LLCs, partnerships and sole proprietors. Some people predict the chance of an S Corp being audited will double. So, what can you do to protect your energy business?
- Ensure you are providing all required information necessary for preparing your return and review it for accuracy. Now more than ever there will be somebody at the IRS actively looking for missing tax ID numbers, address mix-ups, incorrectly entered social security numbers, etc. as a reason to flag a return for audit.
- Make sure everything matches. For example, if you issue 1099 forms, be certain the figures you provide vendors are what you report to the IRS.
- Do the math. Hopefully you have a qualified tax accountant preparing your tax returns. But, just in case, double check your numbers. Math and number errors are a red flag.
- Don’t get too cute with tax sheltering strategies. Recurring business losses may raise eyebrows at the IRS and trigger an audit. Ironically, a huge jump in income can also be suspicious.
- Focus on strategic tax planning. Take advantage of every tax credit and deduction to which you are legitimately entitled. There may be many tax saving opportunities available that you might not know about. That’s where an accountant or tax advisor with experience in the energy industry can help. For example, the IRA itself includes a provision that doubles the refundable research and development tax credit (details in next section).
Let us be very clear: Despite their negative connotation, audits and auditors are good for taxpayers who follow the rules, as they help to ensure that everyone pays their fair share. If you stay within the regulations and follow the advice of your tax advisor, you should not have to worry about how many more auditors the IRS deploys.
Take the time to strategically plan purchases and other business investments, track costs effectively and accurately, use deductions and credits correctly, and file taxes on time, and you should be fine. Even if the IRS selects you for audit, the representation and support of a qualified tax professional should help prevent the audit from becoming a bad experience.
More from the IRA
Excess Business Loss Limitations Extended: Excess business losses are business losses that exceed business income (without regard to any deduction for Qualified Business Income or Net Operating Losses). The IRS Limitation applies to pass through entities such as S Corps, partnerships and sole proprietorships. It does not allow a “business” loss to exceed $270,000 for single filers or $540,000 for married joint filers for the tax year 2022. (This limit is indexed annually.) This limitation was scheduled to expire at the end of 2026 but the IRA has extended the restriction for an additional two years, which is expected to add another $52 billion in tax revenue. This delays the return of a helpful tax tool until 2029.
R&D Tax Credit Doubled: Buried within the IRA is a provision that doubles the refundable research and development tax credit from $250,000 to $500,000. The tax credit is refundable and applied against payroll taxes and includes expenditures for a wide variety of expenses, including the improvement or development of products, processes, techniques or even software.
Marty Kirshner and Joe Ciccarello are Partners in the Energy Practice Group at Gray, Gray & Gray, LLP, a business consulting and accounting firm that serves the energy industry. They also lead the firm’s FuelExchange program. They can be reached at 781-407-0300 or firstname.lastname@example.org.