The Inflation Reduction Act: What Does it Mean for Tax Payers in 2023 (and Beyond)?
On August 7, 2022, the United States Senate Passed the Inflation Reduction Act (“the Act”) along party lines by a vote of 51 to 50. The House of Representatives passed the bill without changes, and President Biden signed it into law on August 16, 2022. Experts and politicians disagree about whether the Act raises or lowers the deficit. They also disagree about whether the Act will decrease inflation.
Let’s look at some ways that the Act will affect average taxpayers and businesses throughout the United States.
The Inflation Reduction Act: What Does it Mean for Taxpayers in 2023?
The White House states that the Act lowers costs for families while reducing the deficit and addressing key issues important to our nation. The stated goal is to grow the economy from the “bottom-up and middle-out” instead of trickling down from the wealthiest taxpayers.
However, what does the Act mean for average taxpayers in 2023?
Effects On Individual Income Taxes
The Act does not directly increase taxes for most Americans. However, an analysis by the Tax Foundation found that provisions of the legislation could have an indirect impact on individual incomes.
The expectation is that increasing the corporate tax rate could reduce economic output, creating about 30,000 full-time jobs and reducing the average after-tax income for many Americans in the long term. In addition, shareholders would bear the brunt of the new corporate tax rate in the long term, indirectly affecting their income tax debt.
Effects On Corporate And International Taxes
The Act creates a 15% minimum corporate tax rate for corporations with at least $1 billion in income. According to figures from the White House, some of the “largest, most profitable corporations” paid nothing in federal income tax.
The act is estimated to raise $222 billion in income for the government by increasing the minimum corporate tax rate to 15%. The Act also contains a 1% excise tax on corporate stock repurchases, which is estimated to raise another $74 billion in revenue.
Am I Going to See an Increase in My Federal Income Taxes?
According to the current figures, the Administration claims that no family earning less than $400,000 will see an increase in their federal income taxes. However, the answer to this question comes after millions of taxpayers file their tax returns under the new law.
The Act creates new tax credits and rebates that Americans can use to reduce their individual income tax debt and save money on energy-efficient purchases. Some of those tax credits and rebates include, but are not limited to:
Upgrading Electrical Wiring
There is a $2,500 tax credit if you upgrade your electrical wiring to save energy. There are also rebates for upgrades, including air sealing, ventilation, and electric load service center upgrades.
However, there is a cap on who can claim the tax credit. You must make 80% or less of the median income in your area (HUD’s definition of a “low-income household”) to qualify for the tax credit.
Purchase Electric Vehicles
The Act includes an incentive to buy electric vehicles. A taxpayer could qualify for a credit of up to $7,500 to purchase a new electric vehicle and up to $4,000 if they purchase a used electric vehicle beginning in 2023.
Purchasing Energy Efficient Home Appliances And Upgrades
The Act provides direct consumer rebates and tax credits if you purchase heat pumps, water heaters, air conditioners, furnaces, and other energy-efficient home appliances that save at least $350 per year. The tax credit also covers energy efficiency improvements such as installing windows, doors, and skylights.
Installation Of Solar Panels
Installing solar panels on your residential roof could result in a tax credit of 30% through 2032. After that, the tax credit decreases to 26% in 2033 and 22% in 2024.
Research Requirements for Tax Credits Before You Spend Any Money
The requirements to qualify for the tax credits in the Inflation Reduction Act can be confusing and complicated. You must meet each specific requirement to claim the credit on your tax return. In addition, the requirements for each tax credit are different. There are also caps for most credits and incentives.
Some requirements relate to the item being purchased or your investment in clean energy. Other requirements relate to household income and individual taxpayer circumstances. Therefore, before investing in clean energy or energy-saving items, it would be wise to discuss the potential tax creditors with a federal tax attorney or tax professional to ensure you can qualify for the tax credit and your actions will maximize the credit.
Does the Inflation Reduction Act Really Curb Rising Prices for Consumers?
The answer to this question depends on who you ask. The democrats say the Act curbs rising prices for consumers and slows inflation. The republicans refute those claims stating that the Act does nothing to reduce inflation. The experts have mixed opinions too.
In the short term, the Inflation Reduction Act will not likely curb inflation much. The Congressional Budget Office found that the legislation is not likely to have a significant impact on inflation this year.
However, the Act targets two key spending areas for Americans: healthcare costs and energy.
Reductions in those costs take time, and the initial investment in energy-saving measures could be too expensive for many Americans.
How Will the Inflation Reduction Act Decrease Inflation?
The White House claims that addressing the rising costs of energy and health care while decreasing the deficit lowers inflation. These arguments are from the current Administration. Experts and others disagree with the Administration’s assertion that these efforts will significantly affect the rate of inflation in America
The four areas of the legislation specifically addressed in the White House Fact Sheet are:
Creating Clean Energy Jobs
The Act creates good-paying, clean energy jobs that help reduce emissions across all sectors of the economy. Bonus credits are included in the legislation for businesses that pay prevailing wages and hire registered apprentices. It also includes penalties for companies that do not follow through with promises to pay employees prevailing wages.
Additionally, the Act includes provisions to use American-made equipment for clean energy production. It expands the clean energy tax credits for clean fuels and carbon capture. Whether these measures may reduce inflation are debatable because it is unknown how many businesses may take advantage of these clean energy incentives.
Creating A Fairer Tax Code
The Act, according to its proponents, takes several steps to create a fairer tax code for American taxpayers. The White House claims that no family making less than $400,000 will experience an increase in their taxes, while forcing wealthy individuals and large corporations to pay a fairer rate for taxes.
The Act provides for:
● Tax enforcement
● Minimum corporate tax rate of 15%
● 1% surcharge on corporate stock buybacks
● Investments in taxpayer services
The immediate effect of these changes is unlikely to impact most Americans. Instead, it could take years before these measures have any real impact on the American economy.
Impact On American Manufacturing
The White House claims that the Act revitalizes American manufacturing. It states that the Act will do this by:
Providing incentives for domestic production of clean energy technologies
Providing targeted tax incentives for companies to produce U.S.-sourced products for clean energy to support American workers
Increasing the clean energy tax credits for businesses that create clean energy projects in areas that previously relied on jobs in the oil, coal, or natural gas industry
As with the other strategies, the impact of these provisions in the Act depends on American businesses reacting as projected to the incentives and tax credits. Therefore, the impact on inflation and future deficits will depend upon the level of participation by companies and individuals who benefit from the credits and incentives.
Lower Health Care Costs
Healthcare costs are one of the top concerns for many Americans. The Inflation Reduction Act promises to lower the cost of prescription drugs to a targeted group. The legislation provides for a phased-in cap for out-of-pocket costs for Medicare recipients. In addition, it places a $35 cap on a monthly supply of insulin.
Medicare can now negotiate prices for high-cost medications for the first time in history. The Act extends savings for millions of Americans on health insurance premiums while making health insurance available to more Americans.
Even though many Americans may see a reduction in their health care and prescription drug costs, these provisions could negatively affect the economy. For example, lowering Medicare drug prices could result in manufacturers shifting the cost to the commercial market. Furthermore, manufacturers could increase the cost of new drugs to offset the impact of the Act's provisions.
What New Government Spending is Included in the Act?
One concern opponents of the Inflation Reduction Act voiced is an increase in new government spending. The Act includes the most significant federal outlay in efforts to curb climate change. It also makes considerable changes to lower healthcare costs. How much does this cost Americans?
Again, the answer to this question depends on who answers it. The democrats estimate that the cost of government outlays is $437 billion, including $369 billion for energy security and climate change investment, $64 billion for expanding the Affordable Care Act, and $4 billion for Western drought resiliency.
However, the democrats estimate the revenue raised by the provisions in the Act totals $737 billion. Therefore, to put the matter in perspective, the total deficit “reduction” from IRA would be more than $300 billion by the end of the decade when the gross federal debt is projected by CBO to have grown to $40 trillion.
The Penn Wharton School at the University of Pennsylvania estimates that the Act could reduce cumulative deficits by $248 billion over the next decade. This study is cited by many who opposed the Inflation Reduction Act because it also states that the Act will have no distinguishable impact on inflation.
Does The Inflation Reduction Act Call for 87,000 New IRS Agents?
The Act includes $80 billion for the Internal Revenue Service (IRS). Many social media and online sources claim the money is to hire new agents to conduct audits. However, the IRS funding is spread over ten years, with roughly half of that figure being designated for IRS enforcement activities.
Therefore, some money is likely to be spent hiring new agents, which could include agents to conduct audits and other enforcement activities. However, the exact number is unknown. Furthermore, there does not appear to be a “target” placed on any particular taxpayer group for increased tax audits.
The 87,000 number might have been taken from a Treasury Department estimate in 2021 that the IRS needed to hire 87,000 more agents to remain “efficient” as employees retire or leave the agency. The funds for enforcement could also be used for legal support or investments in technology.
The Inflation Reduction Act: Does it Really Mean More Audits for Smaller Businesses?
Many small business owners fear tax audits. These companies are generally the least able to bear the cost of a tax audit. However, the hope is that the IRS funds for enforcement will now allow the IRS to focus its audits and enforcement efforts on larger corporations that might try to avoid their tax liability. Although some sources claim that the IRS will target small businesses and upper-middle-income taxpayers for audits, that remains to be seen.
In a letter to the Senate, IRS Commissioner Charles P. Rettig stated that resources in the Inflation Reduction Act are not about increasing audit scrutiny on middle-income Americans and small businesses. The investments instead would help the IRS pursue examinations of high-net-worth taxpayers and large corporations to ensure they pay their legal tax liabilities.
Who is at a Higher Risk for Audits in 2023 and Beyond?
The U.S. Government Accountability Office (GAO) reports that audit trends in recent years reveal higher than average rates for IRS audits of taxpayers with incomes below $25,000 and incomes above $500,000. However, the GAO reports that audit rates have decreased overall income levels. The IRS claims staffing decreases and complex higher-income tax audits caused the decrease in overall audits.
According to records, the IRS audited higher-income taxpayers more often than lower-income taxpayers. However, taxpayers who claimed the Earned Income Tax Credit (EITC) had a higher-than-average audit rate.
The Treasury Department claims enforcement efforts under the Inflation Reduction Act are not focused on small businesses or low to middle-income taxpayers. However, there is no way to know for sure until the IRS receives the funds, hires and trains additional agents, and places those agents to work in the audits and enforcement section.
What is a Tax Audit by the Internal Revenue Service?
The IRS examines specific tax returns during a tax audit to determine if you paid the required taxes. There are three types of tax audits that the IRS utilizes:
Field Audit – An IRS agent comes to your business or home to review your records. Sometimes, you might receive sufficient notice to gather documents and information before the field audit takes place.
Office Audit – You go to a local IRS office for the audit. The IRS requires you to bring documentation to the meeting that proves specific aspects of your tax return.
Correspondence Audit – This type of audit is also known as a mail audit. The IRS sends a written notice to tell you it is auditing your tax returns. The notice contains instructions regarding what issue is being investigated so you can provide a detailed, written response to the IRS before the deadline in the notice.
The issue being audited often dictates the type of audit the IRS conducts. The IRS could review your entire tax return or specific parts of your return. It might focus on one tax return or audit multiple tax returns. Refusing to cooperate with a tax audit can have dire consequences. Instead, it is better to face the tax audit head-on, helped by a federal tax lawyer or other tax professional.
What To Do If You Get an Audit Letter from the IRS
The truth is the best way to fight an IRS audit is to be prepared for an IRS audit. Keeping detailed accounting records and employing a tax professional to help you file your tax returns are ways you can protect yourself if the IRS audits you. Knowing how to handle an IRS audit can also have a significant impact on the impact of an IRS audit.
Do Not Panic If You Receive An IRS Audit Letter
Usually, an audit letter is sent because a tax return was flagged as having a common audit trigger or was chosen in a random selection process. Audit triggers can include:
● Reporting the wrong taxable income
● Making huge donations compared to your income level
● Large amounts of cash transactions or deposits
● Small business deductions that do not match the type of business or income level
● Failing to double-check a tax return for simple mistakes and errors
● Using the same figures each year for tax deductions or income
● Having too many tax deductions
● Self-employment status and 1099 income
● High earnings
● International assets
Many IRS audits are conducted by mail. For a mail audit, the agency asks you to explain something on your tax return. For example, you might have transposed a number or claimed a credit you could not claim. Most IRS mail audits can be resolved for honest mistakes by explaining the error, amending your tax return, and paying any unpaid taxes due with the amended return.
Never Ignore A Letter From The IRS
If you receive any letter or notice from the IRS, a prompt and timely response is required. Ignoring a request for information could lead to an in-person audit. A Notice of Audit and Examination Scheduled letter tells you that you are being audited, the tax year under examination, and the items on the tax return the IRS is reviewing. If you have an accountant or tax professional, immediately notify them of the tax.
Read the letter carefully to determine if the IRS is conducting a mail or in-person audit. Next, note the directions and deadlines for the audit. Then, gather the information and documentation requested in the audit letter. If you are unsure what to do or need help, take the notice to a tax professional immediately.
What Records Will The IRS Ask For During An Audit?
Each audit is different. The scope and items under examination determent what records the IRS might request during the audit. Examples of documents the IRS might request include:
● Evidence of income, including 1099s, pay stubs, income statements, employment records, etc.
● Proof of payment of expenses claimed on the return
● Medical bills and proof of charitable donations
● Tax preparation documents
● Business travel logs
● Evidence of property acquisitions and sales
● Statements and proof of ownership of international assets
● Loan agreements and other documentation regarding debts
● Divorce, property settlement, and child support orders
● Documents for civil or criminal cases
Besides specific documents, you might also have to complete standardized questionnaires that cover assets, income, debts, and expenses.
Determine if You Need a Federal Tax Lawyer
The scope of the tax audit determines whether you need a federal tax lawyer. Contact a federal tax lawyer immediately if you intentionally tried to avoid paying taxes. Penalties for tax fraud can include prison time and significant fines.
Even if you are innocent, having a federal tax attorney handle the audit can be beneficial, especially if you are a high-income taxpayer, a corporation, or a small business. A tax lawyer helps protect your legal rights during an IRS audit. An attorney also ensures that the IRS investigation is conducted correctly and complies with all relevant tax laws for your situation.
The key thing to remember if you are audited because of increased IRS enforcement efforts is to seek legal and tax advice from an experienced, qualified lawyer or tax professional.
If you have received a letter from the IRS or are facing other audit activities, contact Steve today. Fighting the IRS alone can be daunting. Having a tax professional handle the IRS audit is less stressful and could lessen the consequences of an audit.
