The Potential Impact of Dismantling the IRS on Business Owners

We are up against an impending tax season and the future of the Internal Revenue Service (IRS) is in question by DOGE and the Trump administration. If the IRS were to be dismantled, the immediate void could trigger states to cash in by raising state taxes, knowing that corporations and individuals have an excess of funds that amount to $4.7 trillion-the amount that the IRS collected in 2023.

This could lead to higher income, sales, and property taxes at the state level, placing a greater financial burden on individuals and businesses. States might lower the thresholds that determine when a business has a tax nexus, or sufficient presence, in the state. This means that even minimal business activities in a state could trigger tax obligations, increasing the complexity and cost of compliance for businesses operating in multiple states. The IRS currently leads tax enforcement efforts with state support. However, with the absence of federal enforcement, states will need to ramp up their own tax enforcement efforts. This could include more frequent audits and stricter penalties for non-compliance, making it essential for businesses to stay vigilant and compliant with state tax laws.

The Importance of Staying Compliant – a history of boomeranging tax policies in the US

Despite the potential dismantling of the IRS, it is crucial for business owners to remain compliant with their tax obligations. Material underpayment or fraud does not have a statute of limitations. This means that tax authorities can pursue cases of fraud indefinitely. This is especially important because the next administration could re-instate the IRS to bring employment back to the 100,000+ current IRS employees. Individuals and business owners must ensure they are up to date on the tax liability and filings to prevent future penalties and potential criminal charges.

We have been here before. The first widespread income tax was introduced with the Revenue Act of 1861 to finance the Civil War. This tax was repealed after the war, and subsequent attempts to reintroduce it faced legal challenges. The Supreme Court then ruled the income tax unconstitutional in 1895, but the federal tax came back once again in 1913 with the creation of the IRS (originally the Bureau of Internal Revenue).

It is important to remain compliant with all Federal tax requirements while the IRS is still intact. In the scenario the IRS disappears, it can reappear in 2028. If that happens, taxpayers who underpaid their taxes or did not file while the IRS was still in place during 2024 and the current administration, will be open to audit.

Conclusion

While the future of the IRS may be uncertain, the importance of tax compliance remains steadfast. Business owners must stay informed, maintain accurate records, and adhere to state tax laws to navigate the evolving tax landscape successfully. By doing so, they can avoid legal troubles, financial penalties, and reputational damage, ensuring the continued success and stability of their businesses.

We at Hagger Tax & Advisory stay up to date with Federal and State tax legislation. Please reach out to us at +1 305-762-9587 or chad.hagger@hagger-tax.com if any questions.

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