Inflation Reduction Act Targets Increased Revenue Through IRS Funding, Audits

The Inflation Reduction Act, after passage by the U.S. House of Representatives on a party-line vote and the U.S. Senate after a tie-breaking vote by Vice President Kamala Harris, was signed into law Aug. 16, 2022.

This law, a scaled-down version of the Build Back Better plan that President Biden campaigned on, contains energy and climate reform provisions, changes to drug pricing through Medicare, tax credits, tax implications, and more.

This article highlights the three provisions that could impact our business customers most.

IRS Funding to Increase

The Internal Revenue Service is slated to receive $80 billion over the next 10 years to increase enforcement, improve operational support, and modernize business systems, among other areas needing attention as the agency rebuilds itself from a decade of funding cuts and loss of personnel.

The goal of more enforcement is to raise revenue for the federal government without hiking taxes, and such a move is expected to bring in about $124 billion.

Businesses should note that they could see more audits compared to the most recent data from the IRS that shows that only 0.3% of corporate tax returns filed in 2018 were audited, which is down from the 1.4% that were audited in 2010.

In general, the bill does call for a 15% minimum tax on corporations earning $1 billion or more. This is an effort to make multi-national corporations pay more in federal taxes than the limited amounts they are familiar with paying to the IRS.

Others have expressed that the IRS could go in a different direction where audits are concerned, citing that small- and medium-sized businesses would be targeted because of the limited resources they might have to challenge an IRS audit.

However, U.S. Treasury Secretary Janet Yellen sent a letter to the IRS with direction on how the new funding could be spent, emphasizing a focus on high-end noncompliance and not audits and investigations of small businesses that fall below the $400,000 threshold.

IRS Commissioner Charles Rettig expressed the same in an op-ed, as he debunked five points of misinformation that had been circulating about the intent of the increased funding for the agency.

"These resources are absolutely not about increasing audit scrutiny on small business or middle-income Americans. The investment of these important resources is designed to support honest, compliant taxpayers," Rettig wrote for yahoo.com's financial section.

"... A robust, visible tax enforcement effort focused on high-end tax evaders and those supporting them is a priority."

Still, all businesses should do their due diligence when it comes to tax filing.

Extension of the Enhanced Premium Tax Credit

The enhancements to the Premium Tax Credit (PTC), a provision of the Affordable Care Act (ACA), is extended through 2025 under the Inflation Reduction Act. An eligible individual or family that uses the federal marketplace to purchase health insurance will be able to continue benefitting from enhanced tax credits that translate into lower out-of-pocket costs for healthcare premiums.

There remain a number of eligibility requirements to claim the credit, including having a household income above 100% of the federal poverty level. A temporary exception in the American Rescue Plan Act of 2021 removed the upper limit cap (400%) and the new law extends that exception through 2025. An additional 1.1 million Americans were eligible for the credit in 2022 because of the exception, according to the Centers for Medicare and Medicaid Services.

However, while keeping out-of-pocket costs for monthly premiums low for those individuals using the federal marketplace for insurance, Applicable Large Employers (ALEs) subject to Employer Shared Responsibility under the ACA have an increased risk of receiving an assessment for not offering adequate and affordable coverage to their full-time employees, as this PTC is the trigger for an assessment.

Other Provisions of the Inflation Reduction Act

The law, which primarily focused on climate reform and health care, did contain additional provisions, including the largest federal clean energy investment in U.S. history of $300 billion. More than a quarter of the funding would go toward renewable energy, including investing in solar panels and wind turbines. There is also a tax credit for businesses and individuals who purchase electric cars.

There is also a research credit for small businesses that will double from $250,000 to $500,000 beginning Jan 1, 2023. This tax credit allows qualified small businesses the option to claim up to the maximum credit for increasing qualified research activities.

In health care, an attempt to lower drug costs is included in the bill, with the federal health secretary given the power to negotiate prices on certain drugs each year for Medicare. However, the first 10 drugs covered would not be up for negotiation until 2026 with an increase to 20 drugs by 2029.

Paychex Can Help

We understand how time consuming and challenging it can be for businesses to stay on top of their tax liabilities and the complexities of the tax code. Plus, the risks of an audit for noncompliance can create sleepless nights for business owners. Paychex provides payroll tax services and solutions that can help with administration and accurate filing of your payroll taxes, plus a team of more than 100 Compliance analysts who continuously monitor federal and state legislation and regulations to keep you apprised of changes that could impact your business.