According to the Internal Revenue Service (IRS), Americans didn’t pay $688 billion in taxes on their 2021 returns—highlighting an increase of more than $138 billion from 2017-2019 estimates.
To address this ‘tax gap,’ the IRS is taking new actions such as increasing auditing and capitalizing on new laws such as the Corporate Transparency Act (CTA). Certified Public Accountants going into the 2024 tax season need to be aware of the mechanisms being used by the government to serve clients best as they work to fulfill their tax obligations.
Why is this Happening?
There are three common reasons why Americans aren’t paying their taxes:
- Avoidance: A person or organization fears owing a significant tax debt.
- Underreporting: A person or corporation reports a lower amount than they owe—intentionally or through negligence.
- Underpayment: A taxpayer does pay their taxes but fails to do so on time.
All three contribute to the ‘tax gap,’ which the IRS intends to address this year.
How Will This Affect the 2024 Tax Season?
For CPAs preparing for the 2024 tax season, advising clients and preparing financial documents is more complicated than ever. The IRS is set to take urgent steps to increase compliance. This will involve increased auditing for high-income taxpayers, as well as businesses and partnerships.
Additionally, the CTA has gone into effect as of January this year, which will have major ramifications for Americans with large stakes in organizations. Taxpayers must tread carefully to avoid accidental fraud.
Other factors may further complicate CPA’s work, such as a potential end to the Employment Retention Credit and the increasing prevalence of tax scams.
Also read: Best Practices of Client Advisory Services
More Audits, with a Focus on Large Partnerships
New funding through the Inflation Reduction Act (IRA) has caused an increased focus on wealth taxpayers. $80 billion was allocated through the act with the specific purpose of targeting the wealthiest Americans, using those taxes to pay for programs such as green energy investments.
A curious aspect of this activity is the IRS’ new focus on ‘large, complex partnerships.’ However, the definition of partnerships is not set in stone, creating the potential for loopholes. Essentially, partnerships don’t pay taxes directly but pass their tax liability onto the owners of the partnerships through an IRS form K-1. In 2002, there were roughly 3,000 partnerships worth more than $100 million in the country. In 2019, that amount had multiplied six-fold. Only 54 out of 20,000 large partnerships were audited in 2019, making matters worse.
To address this limitation, the IRS will use its new funding and even employ artificial intelligence (AI) to audit multibillion-dollar partnerships in the 2024 tax season.
ERC tax credit pause
The Employee Retention Credit (ERC) was created to help businesses and tax-exempt organizations during the COVID-19 pandemic.
While the ERC has been essential to supporting businesses during a trying financial period, the IRS discovered fraud and aggressive marketing meant to mislead companies or tax-exempt organizations. As a result, the IRS announced it is pausing the ERC tax credit.
For CPAs, staying informed about the ERC’s nuances is crucial. Understanding eligibility criteria, withdrawal processes, new pitfalls, and more is vital to ensuring clients receive accurate and timely information.
The Corporate Transparency Act
Another arm of the government is the Corporate Transparency Act (CTA). The CTA was signed into law in 2021 and went into effect in January 2024. The CTA aims to create a database of Americans with more than 25 percent interest in LLCs, S Corps, C Corps, or limited partnerships. It is part of the government’s efforts to address money laundering, tax evasion, and other financial crimes. However, the CTA comes with new reporting requirements, creating even more confusion for CPAs trying to help clients file their taxes in the 2024 tax season.
Tax Scams are on the Rise
Scams during tax season cost taxpayers millions of dollars and put their personal information at risk. The methods used by scammers are constantly evolving, ranging from regular mail to phone calls.
As a rule, the IRS does not contact taxpayers via email, text messages, or social media. CPAs should remind clients that the IRS initiates contact primarily through the United States Postal Service.
The IRS will never:
- Create urgency in demanding taxes be paid without allowing the taxpayer to ask questions or appeal.
- Demand payment through methods such as a prepaid debit card, gift card, or wire transfer.
- Request checks to third parties. Tax payments should only be paid to the U.S. Treasury.
- Make threats to immediately bring in law enforcement groups that will arrest the taxpayer.
Also read: Preparing for the Worst: Disaster Data Recovery and Written Information Security Plans
Insurance Protects CPAs in a Rapidly Changing Landscape
With the IRS ramping up its coverage, CPAs need their own protection. McGowanPRO is the leading independent agency specializing in Accountants Professional Liability Insurance (Errors & Omissions).
We understand the complexities and challenges CPAs face in guiding their clients through these intricate processes and changing regulations. Contact us to explore how the right insurance can support and protect your professional practice against new challenges. We stand ready to provide the insurance coverage you need for peace of mind.