The IRS recently announced its 10-year strategic operating plan, which lays out how the agency will deliver tax services in the next decade and how it will allocate the $80 billion funds it received as part of the Inflation Reduction Act (IRA). There have been predictions made that the increased funding will result in more scrutiny for higher income taxpayers and the self-employed, especially when it comes to enforcement.
As a freelance business owner, here is a break down of what you need to know:
The IRS plan is structured around these key objectives:
- Significantly improve services for taxpayers to help them meet their tax obligations.
- Provide more staffing to ensure that taxpayers receive refunds, credits and other incentives for which they’re eligible in a more timely manner.
- Resolve taxpayer issues faster.
- Expand enforcement of complex tax filings and high-dollar noncompliance issues.
- Increase operational efficiency through improved technology, data and analytics.
- Recruit, retain and empower a high-skilled diverse workforce and foster a culture that can deliver better results for taxpayers.
The IRS’s strategic plan also aims to improve statistical data to better support equity analyses and strengthen enforcement practices to promote fairness and equity among all taxpayers. However, there is also much speculation that those taxpayers with higher than average income and those who own highly profitable businesses will be targeted for IRS enforcement especially if they do not have their tax obligations in order.
Enhanced IRS enforcement could increase your risk of an audit. The IRA has big time funding for the IRS to the tune of a $3.1 billion to increase for IRS taxpayer services, $45.7 billion for IRS enforcement, $25 billion for IRS operations support and $4.7 billion for IRS technology upgrades. This means the IRS is going to have more resources than they have in almost thirty years directed at ensuring no taxpayer is left behind (or able to hide) at least for very long.
Not only could the full court IRS press mean more audits of small businesses, expedited action for late or non-payment of taxes with fines and penalties, it is likely also to mean that the IRS will be able to monitor online app sales, cryptocurrency transactions, and other less regulated business transactions with enhanced technology expressly for this purpose.
A couple of examples of areas where increased IRS enforcement may impact freelance taxes in 2023 and beyond include:
- The new requirements for third-party payment platforms to report earnings by their users on 1099-Ks to the IRS. Not only is this reporting requirement new, but with added enforcement, there will be more enforcement of taxpayer obligations related to them.
If you are making money on Paypal, Venmo, Etsy and other similar platforms, be sure to account for all of this income and track your sales tax so you can report that accurately as well.
- Outstanding tax bills that are due or unfiled returns will likely be addressed in the short-term by additional IRS agents or technologies. Now is the time to take care of any outstanding tax bills before they catch up with you. Not only will this eliminate the fines and penalties you may be paying, it will also ensure that you don’t get flagged for an IRS audit or additional scrutiny.
Be proactive to avoid additional IRS scrutiny
Now that the IRS Strategic Operations Plan has been released, it’s important to be more vigilant than ever about filing your estimated taxes, tracking all sources of income, substantiating all deductions, and taking care of any past due tax bills or returns. This will reduce your chances of being audited or receiving notices about other tax matters from the IRS as well as other enforcement initiatives the agency undertakes.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available March 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.