In August 2022, the Inflation Reduction Act was signed into law with several provisions including new corporate taxes, clean energy related incentives, prescription drug pricing reform and IRS enforcement.
You may have seen headlines about this act and wonder how it impacts your finances. Our tax expert Rita Yeung, CPA, vice president and manager of tax services, gives a breakdown about what people should know about this act and how it might impact their financial strategy.
This law levies taxes on large businesses – think Fortune 500-type companies with average annual adjusted financial statement income that exceeds $1 billion for a three tax-year period. Rita believes that this portion of the bill may have an indirect impact on everyday consumers due to smaller bottom lines, but the more direct impact comes from provisions to fight climate change.
The Inflation Reduction Act introduced new tax incentives and energy provisions to help accelerate the country’s transition from fossil fuel to clean energy. These incentives are meant to get taxpayers to more quickly adopt clean energy products, like solar panels and electric cars. Starting in 2023 through 2032, if you are looking to purchase a used electric vehicle, for example, you may be eligible for a tax credit.
This law gives the IRS additional funding earmarked for tax code enforcement efforts, business system modernization, increase taxpayer services, as well as to address their staffing shortages. If you have tried to get in touch with the IRS, you may have felt the agency’s staffing issues firsthand. The increased budget will, in part, help to alleviate these issues and allow the IRS to invest in new technology to increase efficiency.
In terms of audits, the rate may increase. Rita points out, however, that the audit rate before 2010 for individual taxpayers was around 0.9%. Over the next decade, that rate decreased to 0.25%. The additional enforcement budget will help the agency get back to the previous audit rate.
An audit is not necessarily something to be afraid of. Rita’s best advice is “don’t try to take deductions or credits that you are not entitled to and always make sure you have documentation to support your position.”
This is why working with a tax professional like an accountant can help you ensure you are getting what you are entitled to and not inadvertently claiming deductions or credits you are not eligible for.
“Don’t panic if you get an IRS notice,” Rita said. Not all IRS notices constitute examinations. You may be getting an IRS notice merely for a computational error and your tax liability is being adjusted. The IRS reconciles tax returns against numbers in its own system for accuracy. If there is a discrepancy, the agency might send you a notice to inquire about why the reported income does not match what your tax forms indicate you earned. It is possible there is a mistake on either end, so Rita advises to take a step back and think about the issue.
When a notice is received, the best practice is to look into what might have gone wrong. For workers who get W2 or 1099 forms, this type of notice can usually be fairly easy to resolve. You may not have been aware of income you are supposed to report, such as lottery winnings (even if you haven’t won a large jackpot). Be sure to make your accountant aware of any type of income, as they can best advise you on how to report earnings on your tax forms.
Sometimes adjustment notices can come from taxes filed a few years ago, which may take time to investigate. Contact your accountant or other tax professional for advice tailored to your unique situation.
On the other hand, if you received a notice regarding an IRS audit, you should immediately contact your tax accountant and review the letter together. You should then start gathering information that the IRS may be requesting in order to provide a timely response. If your audit is being conducted in person, you and your tax accountant will need to schedule a meeting with the assigned agent upon receipt of the letter.
If you’re self-employed, reconciliation may be a bit more difficult depending on what you claim on your tax forms. The IRS might request records from a self-employed filer who claims, for example, a vehicle or advertising costs on their tax forms. Reporting losses consistently over the years for a self-employed business or rental activity might also be challenged to ensure there is no abuse of the tax code.
Good record keeping can save the day in the event of an audit. Record keeping practices are vital for businesses of all sizes and types, as many learned during the process of applying for Payment Protection Program funds. If you are self-employed or own a business, working with an accountant can help you ensure you keep proper records. Ask your tax professional about how to better document to protect yourself.
Accountants and other tax professionals can help you avoid issues, point out deductions that may trigger an audit, and give you peace of mind that you are getting the credits or deductions you are entitled to. Don’t wait until the last minute to meet with a tax professional and be sure to be open and honest about your finances so they can help you.
We at Rockland Trust are here to help you with your financial questions, goals, milestones and dreams. Our Learning Center is designed to answer common questions you may have and provide resources to help make taking care of your finances less daunting. Stay tuned for more timely financial education and advice from our team of experts!
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