The IRS plans to hire thousands of new auditors to go after wealthy tax cheats, but even small businesses and individuals will need to be sure they’re following the latest tax filing rules.
While IRS agents will focus on taxpayers earning more than $400,000 in yearly adjusted gross income, everyone needs to check that they have documents to back up claims such as income, dependents and deductions, tax experts say.
“The IRS is letting us know they’re there. If you were to drive down I-55 and see a state trooper sitting in the median, you’d slow down,” said Tom O’Saben, director of tax content and government relations for the National Association of Tax Professionals.
Beefing up staff is one part of a larger plan by the IRS to modernize and transform its operations, after the passage of the Inflation Reduction Act in 2022 that included an $80 billion investment over 10 years for the IRS. While $20 billion of that was cut last year as part of a federal debt limit deal, the funding will help improve the agency’s customer service and help it become more paperless, among other initiatives.
“We’re in a digital economy. Paper is going away,” O’Saben said. “Maybe you signed off to make your accounts paperless, so you have no paper record of a bank account, an investment account or unemployment payments that you may have taken.”
A key takeaway: Look at last year’s tax return to check that you’re including items that you’ve stopped getting paper records for in 2023.
If you forget and fail to list such items on your tax return, it’s likely that you will get a letter from the IRS asking you to explain the discrepancy.
That’s because banks, employers, financial firms and others submit electronic records about your finances to the IRS. And the agency’s computer systems will check documents filed by institutions like your bank against information in your tax return.
Reporting Venmo and other digital transactions
Changes to the tax law will require users of payment apps like Venmo and Cash App to report sales of $600 or more to the IRS. But the agency announced in November that it would again delay those new reporting requirements to give taxpayers and tax professionals time to understand the rules.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Danny Werfel said in a news release. “Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040. It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”
This means for the tax year 2023, Illinois residents whose sales throughout the year from four or more electronic transactions totaled $1,000 or more must report it on their taxes. Payment apps and online marketplaces should send a separate tax form called a 1099-K to filers.
“Let’s say you sell quilts at a craft fair. If you’re set up to accept Square or Venmo or PayPal — if your customers aren’t paying cash or writing checks — four or more of those transactions that total $1,000 or more require that the third-party settlement firm issue a 1099K,” O’Saben said.
Payments received from family and friends, such as splitting a meal or paying rent, should not be reported on a 1099-K, according to the IRS.
Don’t forget about inflation
This year’s taxes reflect higher inflation as income thresholds for each bracket are adjusted slightly every year for inflation. The uptick helps prevent bracket creep, according to the nonprofit Tax Foundation, which happens when filers are pushed into a higher income tax bracket or “have reduced value from credits and deductions because of inflation.”
The 2023 standard deduction for single and married couples filing separately is $13,850, which includes an inflation increase of $900 from the prior year. Married couples filing jointly have a standard deduction of $27,700, a $1,800 year-over-year increase.
An inflation adjustment is made each year to more than 60 tax provisions, including the earned income tax credit. The earned income tax credit, or EITC, is for workers with low to moderate income that helps offset federal and other income taxes they’ve paid. Eligibility depends on several factors, such as family size and filing status.
For the tax year 2023, the EITC ranges from $600 to a maximum of $7,830 for filers with three or more children. The maximum credit for the tax year 2022 was $6,935.
Filers who qualify for the federal EITC are generally eligible for the state’s EITC, which was increased in 2023 to 20% of the filer’s federal EITC.
If you’re feeling overwhelmed, it’s worth talking with a tax professional. The best way to find a professional is to ask friends or colleagues for a referral, O’Saben said. Then interview the professional to make certain you’re comfortable with the person and feel you can work together to meet your needs.
