Using funding provided by last year's Inflation Reduction Act, the IRS said it will place more attention on wealthy individuals, large partnerships and corporations, including hedge funds and other business entities that have seen sharp drops in audit rates over the past decade.
"The changes will be driven with the help of improved technology as well as artificial intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless 'no-change' audits," it announced Friday.
As part of the effort, the agency says audit rates will not increase for those earning less than $400,000 a year and will establish safeguards for those claiming the Earned Income Tax Credit. The EITC was designed to help workers with modest incomes. Audit rates of those receiving the EITC have been at high levels over the last few years while rates dropped significantly for those with higher incomes, and partnerships and other large business entities with more complex tax situations.
"This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe," said IRS Commissioner Danny Werfel. "I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come."
Werfel added, "There is a sea change taking place at the IRS in every aspect of our operations. Anchored by a deep respect for taxpayer rights, the IRS deploying new resources toward cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse. We will increase our compliance efforts on those posing the greatest risk to our nation's tax system, whether it's the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes.
The IRS said more details will follow in the future but announced key elements of this initiative, including:
Major expansion in high-income/high wealth and partnership enforcement efforts
Prioritization of high-income cases: In what the agency calls the High Wealth, High Balance Due Taxpayer Field Initiative, it will increase focus on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. The IRS says dozens of revenue officers will focus on these high-end collection cases in FY 2024. The agency will be contacting about 1,600 taxpayers that owe hundreds of millions of dollars in taxes.
Expansion of the Large Partnership Compliance (LPC) program: The IRS is expanding its LPC program to audit more large partnerships. The first stage of this program was launched in 2021. The program uses artificial intelligence to identify partnerships with the highest risk of noncompliance. The IRS will audit 75 of the largest partnerships in the U.S., which have an average of over $10 billion in assets.
The LPC program focuses on partnerships with complex structures and tax issues. These partnerships are often difficult to audit, so the IRS is using AI to help identify the most likely areas of noncompliance. The AI analyzes data from partnership returns to identify patterns that may indicate problems.
The IRS is also sending compliance letters to partnerships with discrepancies on their balance sheets. The IRS has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance. These discrepancies are a sign of potential non-compliance, and the IRS wants to quickly address them. The letters will be sent to about 500 partnerships, and the IRS may audit those that do not respond appropriately.
Priority areas for targeted compliance work in FY 2024
The IRS also announced it has launched additional compliance efforts to address serious issues it has seen. Some of these, like abusive micro-captive insurance arrangements and syndicated conservation easement abuses, are already in progress. Other areas of abuse have not.
Among some of the additional priority areas the IRS says it will focus on that will touch the wealthy taxpayers include:
Expanded work on crypto and other digital assets: The IRS continues to expand efforts involving digital assets, including work through the John Doe summons effort and last month's release of proposed regulations of broker reporting. The IRS Virtual Currency Compliance Campaign will continue in the months ahead after an initial review showed the potential for a 75% noncompliance rate among taxpayers identified through record production from digital currency exchanges. The IRS projects more digital asset cases will be developed for further compliance work early in FY'24.
More scrutiny on FBAR violations: Some high-income taxpayers use foreign bank accounts to avoid disclosure and related taxes. A U.S. person with a financial interest over a foreign financial account is required to file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of all foreign financial accounts is more than $10,000 at any time. IRS analysis of multiyear filing patterns has identified hundreds of possible FBAR non-filers with account balances that average over $1.4 million. The IRS plans to audit the most egregious potential non-filer FBAR cases in fiscal year 2024.
Labor brokers: The IRS indicates it is seeing instances where construction contractors are making Form 1099-MISC/1099-NEC payments to an apparent subcontractor, but the subcontractor is a "shell" company that has no legitimate business relationship with the contractor. Monies paid to shell companies are exchanged at money service businesses or flowed through accounts in the name of the shell company and returned to the original contractor. The IRS says it is expanding attention in this area with both civil audits and criminal investigations.
Improved audit selection fairness and equity
In addition to expanding compliance attention on wealthy individuals, large partnerships and other large and complex entities, the IRS says it will focus on ensuring audit fairness and protecting all taxpayers from a variety of scams and schemes. "The IRS is on the side of taxpayers, and we will be working to protect hard-working people from scammers or fraudsters who try to use the tax system for their schemes, whether it's promising people inflated EITC amounts or tricking people into tax-related identity theft," Werfel said.
Improved equity in audits: The IRS says it continues to focus on making improvements in audits involving EITCs and will be implementing changes for the next filing season and will issue more details later this year. As I described in my
Funding challenges and IRA funding cutbacks put IRS initiatives in some jeopardy
As we approach the deadline for funding the federal government for fiscal year 2024, IRS funding remains a question mark. The House would like to cut IRS general operating funding levels while the Senate would maintain current levels with no increase for inflation. In addition, President Biden has already agreed to cut $20 billion of the $80 billion IRS funding as a part of an agreement to raise the debt ceiling this year. And many in the Congress would like further cuts in that initial $80 billion. These funding uncertainties place an urgency in IRS revenue agent hiring to meet the stated goals described above, and failure to get sufficient budget and the remaining IRA funding would certainly place some of the enforcement initiatives in jeopardy.
