What does the Inflation Reduction Act mean for your business?

Even before the Senate voted to pass the Inflation Reduction Act (IRA) on August 7, rumors were flying online about what the bill included and what effect it would have on Americans, especially those with businesses or side jobs.

Though the bill includes provisions to reduce the deficit, institute price limits on prescription medications and decrease carbon emissions, much of the conversation has centered around the included plans to provide the IRS with approximately $80 billion, which could provide the funding to hire as many as 87,000 new employees.

Many Americans, for whom the IRS is a distant concern that conjures up ideas of audits and owed taxes, are understandably concerned about these numbers. But what do they really mean? Are these provisions for the IRS accurate? Why is the IRS being given so much money? Will there be more audits? How will this realistically affect the average American?

Padgett president Roger Harris, a vocal small business advocate and former member of the IRS Advisory Council, helps answer these questions and break down the common concerns about the Inflation Reduction Act.

Does the bill actually include provisions for 87,000 new employees?

According to Harris, maybe, but “there are not going to be 87,000 new auditors on the street tomorrow,” he says.

The 87,000 number is an estimate based on the overall budget. The provided $80 billion could potentially hire that many new employees, but there are several other factors at play in the allotment of the funding.

First, the funds are allotted into four categories: $45.6 billion for enforcement, $25.3 billion for operations, $3.2 billion for taxpayer services, and $4.8 billion for business system modernization. While this would include funding to hire new employees, some of whom may be auditors, it will also need to be spent on buildings and technology. Even if 87,000 new employees were hired, those employees would each need a place to work, with space in an office, a desk and a computer.

Additionally, these funds are intended to be spent across a 10-year span, through September 31, 2031. These new job openings will not be available right away. Even if they were, it’s unrealistic that the IRS would be able to hire so many employees so quickly.

Many businesses are already facing a tough hiring market. For the IRS, who struggles to remain competitive with the private sector, the hiring market is even tougher. It can already be difficult to fill current open positions to replace existing employees who have retired or resigned.

IRS employees also generally undergo extensive training after being hired—in some cases, up to three years before they’re considered fully trained. Without a strong training program in place, existing employees often train these new hires, which in turn, pulls more staff away from their actual job duties. “For example, if you hire ten new auditors, you’d have to take two more out of the field to train them,” Harris said, to illustrate the effect. “So really, you have a net new hire of eight until training is complete.”

Why is the IRS receiving all of this money?

Almost every accounting organization has endorsed more funding for the IRS. In recent years, the IRS has seen a dramatic increase in workload, yet a dramatic decrease in the workforce. You have likely experienced the downsides of an under-funded IRS.

“The IRS collects the money that runs our government,” Harris said. “If you just consider COVID-19, there were stimulus checks, the Employee Retention Credit and the Advance Child Tax Credit, all now being run through the tax system. You’ve also got the Earned Income Tax Credit and the Affordable Care Act run through the IRS.”

With the IRS handling so many crucial tasks for taxpayers, it’s important for paperwork to be handled properly and issues resolved quickly. But with its lack of funding, the IRS has been struggling to keep up. As of August, millions of 2021 tax returns are still unprocessed, leaving many people still waiting for a refund. Inaccurate notices have been sent out to taxpayers. Calling the IRS to resolve an issue like these could take hours—or more.

With additional funding, some of the new employees the IRS could hire will help to answer the phones, process returns, and identify errors. The IRS can also improve their technological tools to speed up processing and make issue resolution easier for taxpayers.

“It’s frustrating for a taxpayer to get a notice that says to call the IRS, and then spend hours on hold or end up speaking to someone who can’t even help,” Harris said. “We should all support fixing that.”

Will there be more audits?

“Everybody, take a deep breath,” Harris says. There may be more audits, but this is not necessarily a bad thing: “The problem is not audits themselves, but when we audit the wrong people. This problem is made worse if the IRS agents are inexperienced or not properly trained.”

Part of the concern around increased audits comes from a confusion about what an audit really is. A notice in the mail asking questions about your tax return, while concerning and requiring action, is not necessarily an audit. An audit is a thorough examination of an organization’s finances and generally involves an on-site inspection or verification process with an IRS agent and sometimes lawyers or accountants. This process can be time-consuming and expensive, doesn’t occur as often as many think, and should only be done when absolutely necessary.

In a voluntary tax system such as the U.S., audits are a necessary element. They are needed to catch criminals and to encourage compliance among other taxpayers. However, he urges the IRS to improve its selection process and ensure the auditors are well-trained so that honest taxpayers are not being unfairly audited.

“We need to enforce tax laws, just like we need state patrol on the highway to keep people from speeding,” he said. “They only need to pull enough people over so that the people behind them remember to slow down. What we shouldn’t accept is auditing of honest taxpayers. If I’m a small business owner, don’t waste my time with a four- or five-day audit. It’s expensive, and it’s no good for anybody. It does no good for the IRS to spend their money on audits that produce no revenue.”

What immediate effect will this have on the average American?

Initially, according to Harris, the effect is “little to none.” Time must be spent hiring and training employees, adopting new technologies and improving infrastructure. None of this is a rapid process, so taxpayers likely won’t see the effects for a year or more.

But importantly, the Inflation Reduction Act shows that responsibility has now shifted. Congress is willing to supply the IRS with funding to improve their functioning, so now it is time for the IRS to step up and take action.

“On the surface, the bill is tilted toward enforcement,” Harris says. “And I’m not qualified to speak on why the money was divided this way, but I understand that different problems require different solutions. For example, a person answering the phone can potentially help many taxpayers in a day, yet a person performing an audit deals with one taxpayer at a time. The dollar amount in a budget is not necessarily equivalent to the importance of the activity.”

“What’s the right amount of enforcement to get the level of compliance our tax system needs? That’s what we should be striving for,” he continues. “The IRS clearly needs better taxpayer service, better technology, and just enough enforcement to ensure the integrity of the tax system.”

In his own letter to the IRS, Harris encourages them to spend the time ensuring the money is spent appropriately, and to focus first on rebuilding taxpayer support before increasing enforcement activity. Only then, he suggests, can we expect people to accept the necessity of enforcement.

“Every taxpayer that files their tax return in April and pays the tax they owe expects other taxpayers to do the same. If that basic belief goes away our entire tax system could suffer. We believe that enforcement to reinforce the concept of fairness for each taxpayer should not be controversial.”