IRS Announces Plans to Focus Examinations on High-Income Taxpayers, Partnerships, Corporations and Abusive Promoters With the Help of AI
By Joel N. Crouch on September 8, 2023
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Joel N. Crouch
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On September 8th, the IRS, following a “top-to-bottom” review of enforcement efforts, announced that it will be shifting more enforcement efforts to “high-income earners, partnerships, large corporations and promoters abusing the nations’ tax laws”. The IRS announcement release can be found (HERE).
According to the announcement, the IRS intends to use artificial intelligence and improved technology to “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”. Readers will recall that a significant portion of the Inflation Reduction Act funding to the IRS is earmarked for tax enforcement.
"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. "The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. 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."
"The nation relies on the IRS to collect funding for every critical government mission -- from keeping our skies safe, our food safe and our homeland safe. It's critical that the agency addresses fundamental gaps in tax compliance that have grown during the last decade," 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 is deploying new resources towards 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. These steps are critical for the future of the nation's tax system."
The IRS intends to prioritize high-income cases with its High Balance Due Taxpayer Field Initiative, which focuses on taxpayers with positive income of at least $1 million and more than $250,000 in tax debt. In addition, the IRS will expand its Large Partnership Compliance program by utilizing artificial intelligence and applying “cutting-edge machine learning technology to identify potential compliance risks in the areas of partnership tax”. The IRS has also identified ongoing discrepancies on balance sheets involving partnerships with assets over $10 million, “which is an indicator of potential non-compliance”. The announcement says the IRS plans to send a letter to 500 partnerships requesting information regarding discrepancies, and depending on the response, potentially adding the partnership returns to the audit stream for additional work. The announcement reiterated the IRS’ continued intent to expand its work on digital assets and scrutiny of FBAR violations.
Finally, the announcement says the IRS will also focus on a “scheme” it has seen in Texas and Florida involving “labor brokers”: “The IRS has seen 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 will be expanding attention in this area with both civil audits and criminal investigations”.
The announcement comes on the heels of a report from the Treasury Inspector General for Tax Administration (HERE) that concluded the IRS’s strategy to audit high-wealth taxpayers has fallen short despite increased funding due to the IRS outdated definition of high income and inadequate training on issues involving high-income taxpayers.
If you have any questions about this blog post or any other tax-related topic, please do not hesitate to contact me at jcrouch@meadowscollier.com or (214)749-2456.
According to the announcement, the IRS intends to use artificial intelligence and improved technology to “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”. Readers will recall that a significant portion of the Inflation Reduction Act funding to the IRS is earmarked for tax enforcement.
"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. "The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. 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."
"The nation relies on the IRS to collect funding for every critical government mission -- from keeping our skies safe, our food safe and our homeland safe. It's critical that the agency addresses fundamental gaps in tax compliance that have grown during the last decade," 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 is deploying new resources towards 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. These steps are critical for the future of the nation's tax system."
The IRS intends to prioritize high-income cases with its High Balance Due Taxpayer Field Initiative, which focuses on taxpayers with positive income of at least $1 million and more than $250,000 in tax debt. In addition, the IRS will expand its Large Partnership Compliance program by utilizing artificial intelligence and applying “cutting-edge machine learning technology to identify potential compliance risks in the areas of partnership tax”. The IRS has also identified ongoing discrepancies on balance sheets involving partnerships with assets over $10 million, “which is an indicator of potential non-compliance”. The announcement says the IRS plans to send a letter to 500 partnerships requesting information regarding discrepancies, and depending on the response, potentially adding the partnership returns to the audit stream for additional work. The announcement reiterated the IRS’ continued intent to expand its work on digital assets and scrutiny of FBAR violations.
Finally, the announcement says the IRS will also focus on a “scheme” it has seen in Texas and Florida involving “labor brokers”: “The IRS has seen 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 will be expanding attention in this area with both civil audits and criminal investigations”.
The announcement comes on the heels of a report from the Treasury Inspector General for Tax Administration (HERE) that concluded the IRS’s strategy to audit high-wealth taxpayers has fallen short despite increased funding due to the IRS outdated definition of high income and inadequate training on issues involving high-income taxpayers.
If you have any questions about this blog post or any other tax-related topic, please do not hesitate to contact me at jcrouch@meadowscollier.com or (214)749-2456.
