While the average person saw the last two years focused on responding to COVID, helping businesses survive, and providing stimulus money to keep the economy churning, Konstantin Lichtenwald, Vancouver, notes a quiet wave of change was moving through tied to those pieces of large legislation. Picking up where previous big congressional omnibus bills left off under the prior administration, current passages of U.S. federal law added to the menu and plethora of tax agency reach, including the digital world. Today, Konstantin Lichtenwald warns any business operating with a significant revenue and expecting to shave off an extra handful of profit percentages by avoiding taxes should think again. The digital world has made it extremely easy for tax agencies to marry disparate pieces of information to figure out who is in tax compliance and who is not. Further, those data alignments are increasing.
Tax systems have become a hot priority for government agencies at all levels from what Konstantin Lichtenwald continues to see. With all the billions that has been spent trying to get through the pandemic, the bills are coming due and increasing tax compliance is one of the more profitable ways of increasing tax revenue without actually raising taxes, always an unpopular position in any election. The advent of big data mining is now reaching government, and many tax agencies are putting those tools to use as quickly as possible.
The most common compliance area continues to be tax withholding from employee earnings. Konstantin Lichtenwald notes COVID actually ramped up the reliance on contractors and freelancers, especially with remote work. That became a very attractive target for tax agencies to go after to make sure workers who were in effect being treated as employees were being classified correctly for timely wage tax withholding. Konstantin Lichtenwald has witnessed failure to do so represents one of the most painful penalties a company can realize, in the hundreds of thousands of dollars.
1099 matching has been enhanced even further. The 1099 MISC form is only one of almost 20 different tax reporting requirements that have existed to capture information about payments for services in a variety of industries. With much of the 1099 system being updated for electronic capture, failure to file reporting for payments to vendors and support staff can get both the recipient as well as the paying company in hot water. With a simple match algorithm, tax agencies are finding digital mining of 1099 mismatches to be extremely lucrative in catching missed taxes due.
Konstantin Lichtenwald also warns companies that might be hoping cryptocurrencies might provide effective tax shelters should think again. Governments around the world have put their regulatory scope on cryptocurrencies, particularly stable coins and de-fi liquidity pools, to either shut them down as illegal securities or to layer them in extensive tax reporting of users and accounts. And, given that cryptocurrency transactions are inherently the ideal record-keeping system, trying to hide profits would be almost impossible.
Again, tax compliance is becoming as important as bringing in revenue as a business. There simply isn’t an option, Konstantin Lichtenwald points out, to leave it as a lower operational priority anymore, regardless of the industry a business is in.