A year on, what do clients think about the Inflation Reduction Act?

The federal Inflation Reduction Act, passed a year ago this month, was supposed to be — and may yet be — landmark legislation in the history of the United States and the world and the climate of both. But in the meantime, what can tax preparers expect clients to ask about the act? IRS response times? Audits? Clean energy? Something else? 

“Most questions I’ve been getting from the Inflation Reduction Act have been about the electric vehicle credit,” said Manasa Nadig, an Enrolled Agent and owner at MN Tax and Business Services and a partner at Harris Nadig in Canton, Michigan. “At this rate I expect at least a third of my clients to own a Tesla.”

“We’re seeing that the money earmarked in the Inflation Reduction Act to expand IRS assistance and enforcement is having a big impact on our clients,” said Gail Rosen, a CPA in Martinsville, New Jersey. “The IRS is finally catching up on processing tax returns. In addition, we can now reach the IRS and speak with a live representative, versus the very long wait times we experienced from 2020 through 2022.”

‘Serious uptick’

The Institute on Taxation and Economic Policy touts the IRA as addressing shortfalls in the federal budget by making the most well-off “pay what they owe to society” and “investing new revenues in shared resources including public health and the environment.” 

Critics, meanwhile, attack the IRA’s future effects on the economy, especially businesses’ ability to hire and innovate. Republicans have also cited rising inflation and the potential dangers of pouring more money into the economy.

Whatever each side of the aisle says, the biggest impact from clients’ perspective is from the clean energy provisions, said Bill Smith, national director of tax technical services for Top 100 Firm CBIZ MHM, based in Washington, D.C.

He said these include extensions and enhancements of the individual credit for residential energy efficiency improvements; the individual credit for residential clean energy property; the business deduction provision under Section 179D for energy-efficient commercial buildings; the business credit provisions under Section 45L for energy-efficient multifamily buildings; the individual credit for qualifying plug-in electric vehicles, including a new credit for previously owned vehicles; and a new business credit for qualified commercial clean vehicles.

“We’re seeing a serious uptick in real estate development taking advantage of Section 179D in the commercial sector and Section 45L in the multifamily sector,” Smith said. “And multifamily properties four stories and up can be eligible for the 45L credits in addition to the 179D deductions.”

Smith added that the website for Rewiring America has a savings calculator for energy tax incentives. “It demonstrates how a taxpayer may be eligible for upfront discounts, available tax credits and estimated energy savings based upon the type of dwelling, annual income and the number of persons living in the dwelling,” he said.

‘All carrying guns’

Fundamentally, clients are noticing green — and would-be threats.

“We’ve had clients who benefit from the energy credits,” said Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies, in Cheshire, Connecticut. “We’re really in the consumer market, not corporate, [and] many of the major bits of the IRA were geared to businesses. Energy credits and electric vehicles are the biggies in my practice. Of course, we all benefited from the IRS adding a few extra staff and being able to resolve and process issues more quickly.”

“Energy credits and added IRS funding,” said Mary O’Connor, partner-in-charge of forensic and valuation services at Sikich, a Top 100 Firm based in Chicago. “The IRS funding is anticipated to be spent on new staff and technology upgrades, both of which will largely have positive outcomes for our clients. The hiring of more agents should mean interaction with the IRS will become faster and easier. And the technology upgrades should produce more compatible and more efficient systems.”

The other side of the coin? “The addition of more agents could lead to an increase in audits,” O’Connor said. 

“I don’t anticipate the audit rate to increase much in the next five to 10 years,” said Dan Henn, a CPA in Rockledge, Florida, who said that clients are noticing the ability to take credits on EVs and the misinformation about the use of the “now-$60ish billion” for the IRS to hire 80,000 new agents, “all carrying guns.”

“Around two-thirds of those being hired are replacing retiring employees or covering natural attrition,” Henn said, adding that the IRS will have new areas to audit, such as abuse of the Employee Retention Credit.

The IRS has touted great progress thanks to the IRA funding, including better customer service, paperless processing, online avenues for taxpayer response, cutting-edge tech like chatbots, and investigation of high-income tax cheats.

“They are investing a lot in new and updated technology,” Henn added. “I expect that the IRS of the future will be easier to work with and have better communication with tax professionals and taxpayers.”

Usual worries

The IRA was 700-plus pages — not all of them devoted to green energy or supercharging a long-depleted IRS. Bruce Primeau, a CPA and president of Summit Wealth Advocates, in Prior Lake, Minnesota, said clients are noticing “the extension of the Affordable Care Act for three more years.”

The reason is often clients’ main concern. “We have clients who are retiring and have the ability to reduce their taxable income in their early years of retirement,” Primeau said. “Doing so helps them save on health care costs.”