The IRS has been sounding the alarm for years about being underfunded and being unable to deliver on its duties, losing thousands of employees to budget cuts and retirement over the years. But not any more.
The Inflation Reduction Act (IRA), signed into law in August 2022, invests $80 billion in the Internal Revenue Service (IRS) over the next 10 years. While the legislation may or may not effectively curb inflation, one thing is for sure. It’s helping the IRS shore up its tax enforcement activities. So they can invest in things like investigative technology and hiring more enforcement agents.
In other words… the IRS is hiring. To the tune of tens of thousands of new enforcement agents.
Assume You Will Be Audited
After years of a stagnated budget and declining audit rates, the IRS says small business audits were set to increase 50% in the past year alone. With the agency’s new influx of cash, those numbers will likely be even greater. While being chosen for an audit used to be considered a longshot, CFOs should now assume a forthcoming audit is inevitable. And prepare their books and their people accordingly.
New IRS Agents Won’t Be Seasoned
The rush of new agents being hired on for the IRS will likely come with a learning curve. So businesses will need to be prepared for errors and longer than typical audit cycles.
New agents are more likely to make mistakes that result in costly audits or incorrectly levied tax penalties. Fighting these errors can cost small and midsize businesses tens of thousands of dollars in attorney fees and lost productivity.
Bruce Willey, CFO Magazine
These errors are unavoidable and out of business leaders’ hands. But having consistent and proper accounting books will help circumvent some of the problems and better defend any that arise.
Be Extra-Prepared if you Took Employee Retention Credit (ERC)
The government’s ERC program is a complicated direct tax credit. And the IRS is going to want to know if funding was allocated properly… Did the business apply the aggregation rules properly? Did the business calculate its average number of 2019 full time employees correctly? Your best line of defense against a future audit is to compile detailed documentation right now that outlines every decision made related to your ERC claim. Many payroll providers may be willing to calculate the credits, but they make companies sign a waiver assuming the responsibility for defending those credits in the future. If you used a payroll provider or other third party to calculate your ERC and didn’t receive any supporting documentation, you’re unnecessarily putting your credits at risk.
Fool-Proof Accounting and Payroll Systems
Spreadsheets won’t cut it when it comes to the IRS. You need to use a high-quality accounting system. Preferably one with a built-in payroll system. For smaller businesses with streamlined processes, we like QuickBooks or Xero. If your organization’s needs have outgrown one of these systems, we recommend NetSuite, the leading integrated cloud business software for enterprise resource planning.
Get Your ERP Implemented the Right Way
When it comes to nipping an audit in the bud, having your organization running on a streamlined platform with everything in one place, and having it set up properly, is the only way to go. With NetSuite, you can manage inventory, track financials, accurately apply sales tax, manage payroll with SuitePeople, and even maintain your CRM system all in one place. And with a proper implementation partner at your side – like our NetSuite-Certified experts at Limebox – you’ll be up and running with complete confidence in your data and your reporting – with no more worries of redundancies, miscalculations, or misallocations. So when the IRS comes knocking, you are well-prepared to manage any and all requests, errors, and deep-dive data dumps that come your way.
At Limebox, we help organizations implement and optimize enterprise-ready NetSuite, and custom software solutions, for their entire ecosystem. We deliver bonafide results the first time. With an eye for simplification and a genius for problem solving.