The U.S. Senate has passed the Inflation Reduction Act, which includes several provisions that will almost certainly affect taxes for millions of American individuals and businesses. With the bill expected to be passed by the House with few modifications, let’s look at some of the highlights of the Act on the tax front.

A big boost for the IRS budget. The Internal Revenue Service (IRS) will be receiving an additional $79.6 billion in funding over the next 10 years, more than half of which is earmarked for enforcement. The Congressional Budget Office estimates enhanced enforcement will generate $203.7 billion over the next nine years.

A Government Accountability Office (GAO) study showed the audit rate for Americans making $5 million or more dropped from 16% in 2010 to just 2% in 2019. The new funding will help the IRS to improve collections from corporate and high-net-worth taxpayers. IRS Commissioner Charles Rettig, addressing concerns expressed by some lawmakers, said there would be no increase in audits of households making less than $400,000 per year. "These resources are absolutely not about increasing audit scrutiny on small businesses or middle-income Americans," Rettig wrote in a letter to the Senate.

The remainder of the budget boost will go to operations, taxpayer services, technology updates, and development of a free e-file system.

Higher Corporate Taxes – The Act includes a provision to set a minimum corporate tax of 15% on book income for companies with at least $1 billion in income. If that comes out to be higher than the traditional calculations (21% of profits less deductions and credits) companies would have to pay the 15% rate. This measure is expected to raise $313 billion in new revenue.

Stock Buyback Taxes – The Act imposes a 1% excise tax on stock buybacks. This is an effort to impel companies and institutional investors to reinvest earnings or pay dividends rather than artificially boosting share prices via stock buyback. The excise tax may raise an additional $74 billion in revenue. But it could also negatively impact smaller investors and slow equity market demand.

We will continue to follow the Inflation Reduction Act as it works its way through Congress, and report on any changes made in the House version. For additional information, please contact Gray, Gray & Gray at (781) 407-0300.