In today’s episode of Adam Talks, Adam Bergman, Esq. reviews the new IRS budget and how it’s going to impact IRAs and 401(k) plans.
The IRS has released two reports outlining their strategic operating plans for the coming years. Both reports focus on enforcement, technology, and client services, with large corporations, high net worth individuals, and large partnerships above $5 million in revenue being the primary targets for increased audit activity. The IRS plans to spend $80 billion in cash it received from the Inflation Reduction Act, with 50% of the money going toward enforcement, primarily because it is expected to generate the most revenue.
Individuals earning less than $400,000 in personal or business income will not see an increase in audit risk, according to both reports. Self-Directed IRAs and Solo 401(k) plans are not part of the enforcement focus, and cryptocurrency ownership does not appear to be a taxable event. The reports notes that 99% of all IRA and 401(k) investors are not doing private transactions and are investing in stocks, real estate, and fixed income. Only a small segment of investors are not doing what they should, and the IRS knows that.
The IRS plans to hire more people, primarily in enforcement and taxpayer services, with 7,500 new hires expected in the next year. However, enforcement increases are not expected until at least 2025, as it will take years to train new recruits. The reports also notes that the highest enforcement actions currently target low-income taxpayers who receive an earned income credit, but the new focus is on larger corporations and high net worth individuals. The agency believes that these groups have more resources to defend themselves against an audit, while low-income taxpayers are more likely to pay without questioning.
The reports do not mention “retirement” or “pension plan,” but they do refer to IRAs. Tax attorney Adam Bergman believes that it will be difficult for the IRS to hold true to its pledge not to target taxpayers earning less than $400,000. It will be challenging to confirm that partnerships and corporations that have reported less than $400,000 did not take incorrect deductions that reduced their taxable income. Bergman also believes that it will take many years to see an increase in compliance in large corporations and large partnerships because of their complex structures.
In summary, the reports indicate that large corporations, high net worth individuals, and large partnerships will face increased enforcement, while individuals earning less than $400,000 will not. Self-Directed IRAs and Solos are not part of the enforcement focus, and cryptocurrency ownership does not appear to be a taxable event. The IRS plans to spend $12 billion on technology and $8 billion to retain employees, but enforcement increases are not expected until at least 2025. The IRS needs to ensure that it does not overstep its responsibilities and harass taxpayers.
To learn more about the IRS’s plans, listen to the podcast.