The Internal Revenue Service (IRS) has begun an initiative to improve tax compliance among high-income earners, partnerships, large corporations, and promoters abusing the nation’s tax laws.
The effort, which stems from Inflation Reduction Act funding, will place more attention on wealthy individuals, partnerships and other high earners that have seen sharp drops in audit rates over the past decade. Further, the IRS will ensure that audit rates do not increase for those earning less than $400,000 a year.
The IRS will deploy improved technology as well as artificial intelligence to help it better detect tax cheating, identify emerging compliance threats, and improve case selection tools to avoid burdening taxpayers with needless “no-change” audits. In addition, the IRS will put in place new fairness 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 remain at high levels in recent years while rates dropped precipitously for those with higher income, partnerships, and others 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,” IRS Commissioner Danny Werfel said. “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.”
Some of the key elements of this new effort include:
• The prioritization of high-income cases. Specifically, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt.
• Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI). The complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues and apply resources accordingly.
• Greater focus on partnership issues through compliance letters. 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. Taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year.
Other priorities include expanded work on digital assets; foreign bank account violations; labor brokers; and protecting taxpayers and businesses from aggressive scams and schemes.
“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,” Werfel said.