Small business owners may soon be in for a lengthy and expensive battle with the IRS, tax experts warn.
A key provision in the Inflation Reduction Act — which throws an extra $80 billion to the IRS to improve the agency’s collection of under-reported income — will end up targeting small business owners to pay for the legislation, according to nonpartisan watchdog the Joint Committee on Taxation.
The group estimates that between 78% and 90% of the estimated additional $200 billion the IRS will collect will come from small businesses making less than $200,000 annually.
Just 4% to 9% would come from businesses making north of $500,000 a year — meaning the legislation is in sharp contrast to President Biden’s longstanding claim that he wouldn’t raise taxes on anyone making less than $400,000.
“The IRS will have to target small and medium businesses because they won’t fight back,” Joe Hinchman, executive vice president at the National Taxpayers Union Foundation, told The Post. “We’ve seen this play out before … the IRS says ‘We’re going after the rich’ but when you’re trying to raise that much money, the rich can only get you so far.”
In fact, going after the lower and middle class can actually be more lucrative for IRS auditors than trying to get more money from the wealthy. “The rich have their lawyers and fight it — that’s why the poor are easier to go after,” Hinchman adds.
Accordingly, tax experts warn that the IRS’s audits will be far more painful and costly for small business owners — even for those who think they’re filing their taxes correctly.
“Most small businesses aren’t doing anything wrong,” Daniel Bunn, executive vice president at the Tax Foundation, told The Post. “We don’t make the tax code simple and the complicated tax code makes it difficult for small business owners to comply with all the requirements.”
Even if small business owners get everything right, they may still be faced with a headache since part of the IRS expansion will involve sending out more notices and letters to businesses, Bunn adds. For individual contractors or small businesses, an IRS letter that they owe more money or made an error on their taxes can put them underwater.
“Anytime you get an IRS letter, it could take months or years to get it settled — we’re talking many thousands of dollars to address,” Bunn added. “Large companies have constant reviews and lawyers going through everything… small business doesn’t have the resources to fight back in the way.”
The White House has dismissed claims the bill will hurt lower- and middle-income Americans, instead noting the JCT estimate doesn’t take into account how much the bill will offset costs for average Americans like prescription drugs.
But tax experts aren’t so sanguine about the reality of giving the IRS more resources.
“The approach here is to double the IRS workforce, take the leash off, and see how much they can collect,” Hinchman adds. “I think they’ll collect it but it will be quite painful.”