The Inflation Reduction Act is a law passed in 2022 that aims to address various economic challenges in the United States, including inflation, healthcare costs, and climate change.

A critical component of the IRA is the substantial increase in funding allocated to the Internal Revenue Service (IRS), specifically targeting the enhancement of its operational capabilities and auditing functions. The overarching goal is to improve tax compliance and close the substantial tax gap, which is the difference between taxes owed and taxes paid on time.

The IRA provisions for the IRS include:

1. Increased Funding: The IRS will receive an additional $80 billion over the next decade. This funding boost is earmarked for enhancing enforcement capabilities, modernizing technology, and improving customer service.

2. Enhanced Technology: The IRS will invest significantly in advanced data analytics and artificial intelligence to streamline operations, identify non-compliance patterns, and enhance audit selection processes. This technological upgrade is expected to result in more efficient and effective tax collection and enforcement activities.

3. Workforce Expansion: The increased budget will facilitate the hiring of thousands of new IRS agents and support staff. This expansion aims to bolster the agency's capacity to conduct thorough audits and investigations, particularly targeting high-income individuals and large corporations.

1. Starting in 2025, businesses should anticipate a marked increase in IRS audit activity. The enhanced resources and technological capabilities will enable the IRS to conduct more comprehensive and frequent audits. Key areas of focus are expected to include:

1. Large Corporations: Due to complex financial structures and potential for significant tax liabilities, large corporations will be a primary target for increased audits. The IRS will scrutinize corporate tax returns, transfer pricing arrangements, and cross-border transactions more closely.

2. High-Income Individuals: High-net-worth individuals and business owners will also face heightened scrutiny. 

3. International Transactions: With the globalization of business, international transactions and offshore activities will come under increased examination.The IRS will leverage its enhanced data analytics capabilities to detect and address issues related to international tax compliance, including compliance with FATCA.

The Foreign Account Tax Compliance Act (FATCA) is a U.S. federal law designed to combat tax evasion by U.S. persons holding accounts and other financial assets outside the United States. 

United States Citizens and Resident Aliens should be aware of their obligations under FATCA which require that they file 1) FinCEN Form 114 for the purposes of FBAR (Report of Foreign Bank and Financial Accounts) and 2) Form 8939 with the IRS to report certain foreign financial assets. 

Digital Nomads and American Expatriates should be aware of the obligations under FATCA but also the benefits of excluding up to $125,000 of Foreign Earned income by utilizing the Form 2555 Foreign Earned Income Exclusion. 

Corporate entities must proactively prepare for the upcoming expansion of IRS operations and audits. Here are some steps businesses can take to ensure compliance and mitigate potential risks:

1. Strengthen Internal Controls: Implement robust internal controls and governance frameworks to ensure accurate financial reporting and tax compliance. Regularly review and update these controls to address any identified weaknesses.

2. Conduct Internal Audits: Regular internal audits can help identify and rectify compliance issues before they attract IRS attention. Focus on high-risk areas such as transfer pricing, inter-company transactions, and international tax compliance.

3. Seek Professional Advice: Engage with tax professionals and legal experts to navigate the complexities of the evolving tax landscape. A thorough review of tax strategies and documentation can help ensure compliance and minimize the risk of adverse audit findings.

4. Stay Informed: Keep abreast of regulatory changes and IRS guidelines. Regularly update your knowledge of tax laws and ensure your business practices align with current regulations.

The Inflation Reduction Act signifies a transformative shift in IRS operations, with a substantial expansion of auditing activities set to commence in 2025.

Corporate entities must be vigilant and proactive in ensuring compliance with tax laws to navigate this new landscape effectively. By strengthening internal controls, conducting regular audits, seeking professional advice, and staying informed, businesses can mitigate risks and maintain a strong compliance posture.

Della Torre Law, PLLC