IRS's Extra Enforcement Funding Brings Audit Worries

With $80 billion in funding from the Inflation Reduction Act, the IRS is already busy overhauling its services and infrastructure amid concerns this will mean more audits for taxpayers. Among the recommended uses of the funds is the formulation of guidance on tax credits and provisions and an improvement of overall service. In particular, the electric vehicle tax credit expansion, also from the Inflation Reduction Act, is getting a lot of attention due to its implied impact on the automotive industry.

The electric vehicle tax credit may not be going into effect until January 1, 2023, but partner and automotive practice leader Tom Alongi says the incentive is going to have a tremendous impact on the industry now. "The EV credit is interesting when you peel back the onion on that one and really look at it," he said. "As of today, there are maybe one or two vehicles that would actually meet the requirements of the bill. But new vehicles will be rolling out that will ultimately be favorably impacted by the credit. But 40% of the assembly and some of the battery content needs to be in the U.S. and that's going to increase to I think almost 80% in 2027. It's what we need to do to reshape manufacturing and the automotive sector to accelerate growth for EVs."

The industry is also accelerating the timelines for electric vehicle production in preparation of the credit with demand already high. "We're now in a race against time when you think of where we are in total EV production of the market of less than 3% of total vehicles to where we want to get to," said Alongi. "It probably won't be from a lack of demand. It will likely be really on the supply side. Over 57% of critical minerals are controlled by China, so we have a lot of catching up to do. There are obviously some incentives in the bill for minerals and mining, so that's going to be critical for us to build up that supply chain within the U.S. It's not going to happen overnight, but we're trying to accelerate it as fast as it can. Having owned an EV Tesla for more than three years, I can say that it is very viable. It's not for everyone, but we certainly can get to 40 or 50% of the market in 10 to 15 years."

There are additional tax provisions touted in the bill for renewable energy, but those could have an underwhelming initial impact. "For residences you can get a 30% credit for solar," said Alongi. "Well, there already was one. The credit this past year was 26%, so I don't know if the extra 4% really entices you to go out and put solar on your roof. They made a few changes to what's kind of the non-business credit, the 25C credit, for heat pumps. The limit is now $2,000 versus setting it at $1,200. There are some minor changes, but I don't know that those really move the needle. And the $60 billion in this bill that's set aside for — they label it as environmental justice — will it really spur lower-income neighborhoods to adopt solar and wind? I don't know."

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