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The Internal Revenue Service (IRS) is undergoing significant changes, with a notable reduction in its workforce as part of broader governmental downsizing initiatives. In February, approximately 7,000 probationary employees were laid off from the agency’s total staff of around 90,000. Subsequently, reports emerged in early March indicating that the IRS is contemplating a staff reduction of up to 50% as part of measures initiated during the Trump administration.
If these plans are executed, the resulting workforce would be 44% smaller than it was in 2020 and 60% less than the levels seen in 1995, according to data from the IRS.
In addition to workforce reductions, the IRS is facing budget cuts. A federal spending bill signed by President Trump on March 15 reclaimed $20.2 billion in funding designated for the IRS through the Inflation Reduction Act. Furthermore, Sam Corcos, a technology CEO collaborating with the Department of Government Efficiency at the IRS, highlighted on March 20 that significant contracts could be eliminated from the agency’s budget.
These developments raise crucial questions for entrepreneurs regarding their tax obligations and potential audits moving forward.
Reduced Risk of Unwarranted Audits for Entrepreneurs
Concerns about stringent audits had increased during the Biden administration, especially with the initial iteration of the Inflation Reduction Act proposing over $46 billion to enhance tax enforcement. This funding aimed to target affluent taxpayers suspected of underreporting their taxes. While the focus was ostensibly on addressing tax evasion, it is likely that audit rates could have intensified across various tax demographics.
As the IRS faces financial constraints, the likelihood of intensified audits may diminish. This is especially beneficial for entrepreneurs operating within partnerships. The IRS previously indicated that it would not elevate audit rates for those earning under $400,000, thus amplifying its scrutiny on partnerships and high-income earners. With funding cuts, this focused enforcement may not be as vigorous, offering respite for many entrepreneurs and investors who frequent partnership structures.
Audits can be taxing—not just in the financial sense, but emotionally as well. Historically, the costs associated with auditing can range from $10,000 to $30,000, not counting any additional tax liabilities, penalties, or interest incurred from an audit outcome that is unfavorable.
Deterioration of Taxpayer Support Services, at Least Temporarily
Taxpayers and tax professionals have consistently criticized the inadequate customer support from the IRS. Many have experienced prolonged wait times when attempting to reach a representative; the average wait was reported at 13 minutes in 2023, with only half of the calls resulting in human contact. This minor improvement comes after a year in which the average wait exceeded 28 minutes, with a strikingly low 21% of callers managing to connect with someone.
The marginal enhancement in service was partly due to the IRS hiring thousands of customer service representatives in late 2022. However, the anticipated reduction in workforce is likely to revert wait times to the previous lengthy durations. On a positive note, should the IRS continue its modernization efforts, it may eventually enhance service efficiency without necessitating a larger staff. The use of artificial intelligence to assist in basic inquiries could streamline processes, allowing taxpayers to resolve common issues independently.
Despite these changes, it is crucial for entrepreneurs to remain vigilant regarding their tax responsibilities. The IRS will persist in operating, and compliance with tax laws continues to be paramount.
Entrepreneurs can leverage numerous government tax incentives designed to spur growth and reinvestment. Engaging with a certified public accountant (CPA) who is well-versed in the complexities of the tax code can be beneficial. They can offer proactive strategies aimed at minimizing tax liabilities while ensuring compliance with existing laws.
When selecting a CPA, it’s wise to evaluate their experience with the IRS. Questions about their experience with audits and what steps they would take if an audit occurs can provide valuable insights into their confidence and capabilities. Additionally, discuss the possibility of implementing an audit protection plan, which may provide financial peace of mind should an audit arise.
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