In August, the IRS received a large amount of money due to the Inflation Reduction Act. Over half of the funds received will be relegated to IRS enforcement in an effort to narrow the tax gap.
What is the tax gap?
It’s the amount of taxes owed vs the amount of tax paid or collected by the IRS. The IRS lists 3 taxpayer scenarios as influencing the tax gap:
The non-filers (those taxpayers that do not file any tax returns)
The under-reporters (those taxpayers that file tax returns but under-report on the returns)
The under-payers (taxpayers who file taxes on time but do not pay or pay less than what is owed.
It’s the under-reports that IRS auditors target.
In August, the IRS estimated the tax gap at $496 billion and of that $398 billion was due to under-reporting. Of that $398 billion, the IRS will plan on auditing taxpayers reporting $400,000 and up annual income. The IRS is planning to use the Inflation Reduction Act to hire more auditors and enact new technologies to aid in IRS enforcement to narrow the tax gap. The self-employed will find themselves targeted by the IRS and will see an increase in IRS enforcement the most.
Now is the time to begin diligent record keeping in order to stave off IRS penalties and interest as a result of an IRS audit. Some good recordkeeping steps to put into practice are:
DO NOT mix business with personal!
Maintain a personal bank account and a business account.
DO NOT pay for personal expenses out of the business bank account. Example:Transfer money from the business account to the personal bank account and then go shopping.
Keep all receipts for all business expenses.
The receipts must match the tax return.
If business expenses are over-reported on the income tax return, you owe that tax money plus penalties and interest! Keep in mind, most audits occur 1-2 years AFTER the tax return is filed and that adds up to 1-2 years of penalties and interest!
File and pay your quarterly income tax deposits!
Estimate business income and pay the tax on that income on time! Quarterly tax deposits are due April 1, June 15, September 15, and January 15 of the following year.
Should the tax deposit equal more than you can pay at the time, MAKE UP for the shortfall with the next deposit.
At the end of the tax year, if you find yourself needing more write-offs pay as much of some deductible expenses as possible, prepay other expenses, make charitable contributions, and if reporting mileage on a personal vehicle, remember to write down the year-end odometer reading.
No one wants to be audited by the IRS, but these are some steps that may make an audit easier on you.