What does Inflation Reduction Act mean for high-net-worth taxpayers?
Taxpayers should prepare for increased IRS enforcement
The new Inflation Reduction Act will grant $80 billion to the Internal Revenue Service over the next decade, aimed at funding stepped-up enforcement. While both Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig have said additional enforcement efforts will not target small businesses or the middle class, this increased funding for the IRS will likely result in more audits and overall IRS scrutiny of high-net-worth individuals.
The following are a few considerations for high-net-worth taxpayers who want to prepare for the potential of IRS action.
IRS Global High Wealth program
The IRS is slated to use some of the additional resources to increase examinations of large partnerships and to fund the Global High Wealth program, which targets high-net-worth filers and non-filers who have implemented sophisticated and complex structures or abusive tax transactions.
The Global High Wealth program takes a holistic approach in addressing the high-wealth taxpayer population by reviewing the complete financial picture of these individuals and the enterprises they control. As a result of this increased scrutiny, these taxpayers will likely feel the impact of more IRS actions, including audits.
What to do if you get an IRS notice
If you receive an IRS notice, there are two immediate actions you should take:
- Verify the authenticity of the notice. Remember the IRS does not initiate contact with taxpayers by email, text messages or social media channels to request personal or financial information. If you have been contacted through one of these channels, it may be a scam. The IRS initiates most contacts through regular mail delivered by the United States Postal Service. To verify if a letter is legitimate, go to IRS.gov and search for the number of the letter, notice, or form. The IRS provides descriptions of its notices and letters, which can be identified by the code in the top right corner of the notice or letter.
- Consider contacting a professional tax advisor to assist in the process. Whereas some IRS notices may be quickly addressed by showing the right documentation, other notices may require the assistance of a tax professional. And you should always reach out to a professional tax advisor when you are selected for an IRS examination (aka IRS audit).
4 most common IRS actions
There are typically four types of actions the IRS can take against a taxpayer:
- The IRS can send a notice assessing additional income and penalties should a taxpayer fail to include amounts reported by a third-party on a Form 1099 or Schedule K-1. These notices are often issued as part of the IRS’s Automatic Underreporter (AUR) program.
- The IRS could initiate a campus examination (also known as a correspondence examination), which uses data analytics to identify potentially questionable deductions, expenses, or credits on an original or amended return.
- The IRS could initiate a field examination, which is different from a campus examination. A field examination takes two forms: the general program examination and the team examination program. The general program examination is typically conducted by a revenue agent who will visit an organization’s location. A team examination concerns large, complex organizations, and may involve a team of examiners.
- The IRS could assess penalties for failure to file informational returns, which often occurs in the international context.
What taxpayers can do to mitigate risk of IRS action
If you receive correspondence from the IRS, don’t ignore it. Taxpayers should endeavor to make timely and complete responses to requests for information.
If you have any questions regarding an IRS action, there are phone numbers included with all IRS correspondence that you can contact for more information. And you should consider contacting a professional tax advisor to assist with the process.
Because the IRS randomly selects taxpayers for examinations, not all IRS actions can be avoided. However, taxpayers can mitigate the risk of an examination by properly and timely reporting all income and expenses, including amounts reported on Forms 1099 and Schedules K-1. In addition, to the extent a taxpayer has international exposure, they should ensure that all necessary forms are filed.
Be proactive about tax planning
With new legislation in play and increased funding for the IRS on the way, taxpayers should be proactive about communicating with their tax advisors about any IRS notices they may receive or any questions they may have about their 2022 tax bill.
High-income taxpayers will feel the impact of the stepped-up enforcement from the Inflation Reduction Act more acutely, but all taxpayers should consider getting a jumpstart on tax planning for their personal and business taxes this year. Contact me or another Kaufman Rossin tax professional to discuss your tax situation, including how you can mitigate your risk of an IRS audit and minimize your tax exposure.
Michael Kramarz is a Tax Director at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.