Let’s address the elephant in this Act. The IRS is getting $80 trillion dollars.
This is designed to cover the cost of hiring an additional 87,000 IRS employees and improving services and infrastructure – over the next ten years, not all at once. Bear in mind that 52,000 of the most experienced employees will be eligible to retire in the next 6 years. They will also need to be replaced – with new, less experienced staff.
In fact, we are losing the current Commissioner of the IRS, Chuck Rettig. His term expires on November 12, 2022. Doug O’Donnel has been appointed as the interim Commissioner. Although he has over 35 years of experience working for the IRS – running the entire organization will require quite a learning curve – until he is replaced by a permanent appointee.
As to other new hires, even if the IRS were to hire 5,000 employees today – it takes 3 – 6 months or so before the mandatory federal background checks allow them to start work – and then the additional time to get trained. So don’t expect a huge influx of staff quite yet.
Is the IRS going to use those funds to harass more of your clients? Or to help taxpayers?
Perhaps for both purposes!
First of all, are you tired of sitting on hold for hours with the Practitioner Priority Service (Hotline) and other IRS phone lines – only to get the call disconnected before it’s even picked up? Do you resent paying for the phone bot services to get your call at the head of the line?
Are you tired of the IRS posting delays for payments – and the related balance-due notices for payments people have already made?
Are you sick and tired of getting calls from your clients who are still waiting for their refunds – some from the 2020 tax return?
Well, believe it or not, so is the IRS.
In fact, nearly $5 billion dollars is going towards modernizing information technology (IT) systems. One goal is to establish an authentication system on all IRS collection phone lines to screen out the bots in 2023. (You may be aware of the pilot program now in effect on the Hotline.)
In addition, the IRS is opening two new call centers in 2023 – in Puerto Rico and the Mississippi Delta – currently under-served areas.
The IRS is expanding their Rapid Response Appeals Process (RRAP) pilot program to speed up settling collection cases. Collections intend to provide more automation and to work with Appeals to establish significantly shorter case processing times.
On the other hand, with the employees already on staff, the IRS is using the funds to put more Revenue Officers (collections) and Revenue Agents hitting the field right now. Expect to see them target taxpayers who are delinquent in filing and paying, with an emphasis on the high-income non-filers. So tax collection revenue should be rising.
Aside from the IRS budget, what else do you need to know about the Inflation Reduction Act?
Here are some of the highlights that are apt to affect your clients:
- The premium tax credit has been extended for another 3 years. This is where people buy insurance through the Marketplace, with the government paying part of the premiums. This takes effect right now, as people renew this coverage for 2023. HealthCare.gov has the tools to help your clients do the computations for the lower premiums
- Lower Prescription costs for seniors – out of pocket costs are capped at $2,000 per year. Insulin is capped at $35 per month. Medicare beneficiaries have access to more vaccines at no charge. The Kaiser Foundation website shows a detailed timeline of the implementation of these provisions.
- Increased tax credits for alternative fuel vehicles – For vehicles purchased between August 15, 2022, and December 31, 2032. After December 31, 2022, this credit applies to “new clean vehicles,” instead of just plug-in vehicles. The maximum credit is $7,500 per vehicle that meets both the emission and battery mineral requirements. There are 8 conditions that must be met for the vehicle and ownership to qualify [IRC Sec 30D(d)(1)].
- There are cost limitations – $80,000 for vans, sports utility vehicles, and trucks; $55,000 for all other vehicles. The credit.
- The income phase-out is $300,000 for married filing jointly and surviving spouse; $225,000 for the head of household; $150,000 for single and married filing separately.
- You can find an approved list of 2022 and projected 2023 vehicles here
- The energy efficient home improvement credit has been extended to December 31, 2022. However, people who have already used up their lifetime $500 are not eligible to claim it again.
- The residential clean energy credit has been extended to 2033. The credit is 30% of the cost of qualified improvements. (The credit had been diminishing each year prior to the Inflation Reduction Act. In 2022 it would have been 26%, down to 22% in 2023, which would have been the final year.)
- Clean energy credit for commercial buildings has risen from $1.88 per square foot to a cap of $5 per square foot for certain properties. Energy reduction requirements to qualify have dropped to 25% from 50%. However, the construction must meet certain standards, including wage levels for employees working on the buildings.
- For those small businesses involved in qualified research activities, the research credit has doubled from $250,000 to $500,00. It can be used to reduce payroll taxes starting with the 2023 payrolls. Clearly, to get any real benefit, the company must have a sizable payroll.
- The rules are still being defined and clarified. At the UCLA Tax Controversy Institute in October 2022, panelists were discussing the potential abuse of this credit and the need for increased audit scrutiny. So beware.
- Although the average small tax firm doesn’t have clients of this size, it’s worth noting that this Bill adds a corporate Alternative Minimum Tax of 15%. It only applies to corporations with a BILLION DOLLARS of book income or more.
This should be enough to get you started thinking about how to use the Inflation Reduction Act to help your clients – and yourselves. However, with everything going on this year, I urge you to attend tax update classes as soon as you can.
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