On 9/823, the IRS announced new compliance efforts that will focus on increasing scrutiny on high-income taxpayers, partnerships, corporations and promoters abusing tax rules on the books by using Artificial Intelligence and improved technology to identify sophisticated schemes to avoid taxes. The new IRS compliance efforts are geared towards having the 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. “As part of the effort, the IRS will also ensure audit rates do not increase for those earning less than $400,000 a year as well as adding new fairness safeguards for those claiming the Earned Income Tax Credit”.
Expansion in high-income/high wealth and partnership compliance work
- The new IRS compliance efforts will prioritize high-income cases in the High Wealth, High Balance Due Taxpayer Field Initiative intensifying work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. The IRS plans to build off their earlier successes that collected $38 million from more than 175 high-income earners. The IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.
- Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence. “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. In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population. The IRS is now expanding the LPC program to additional large partnerships. With the help of Artificial Intelligence, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. By the end of September 2023, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets”.
- 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. The number of such discrepancies has been increasing over the years. Many of these taxpayers are not attaching required statements explaining the difference. This effort will focus on high-risk large partnerships to quickly address the balance sheet discrepancy and it will begin in early October 2023 when the IRS will start mailing around 500 partnerships.
Priority areas for targeted compliance work in FY 2024
The IRS has launched numerous compliance efforts to address serious issues being seen such as:
- Abusive micro-captive insurance arrangements and syndicated conservation easement abuses.
- Expanded work on 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% non-compliance 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 Fiscal Year 2024.
- More scrutiny on FBAR violations. High-income taxpayers from all segments continue to utilize 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 during any particular year. IRS analysis of multi-year 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 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 scheme has already been seen in Texas and Florida. Work in this area is critical to improve compliance, and it will also help level the playing field for contractors playing by the rules as well as ensuring proper employment tax withholding for vulnerable workers.
- Helping working taxpayers through improving compliance selections; protecting taxpayers and businesses from aggressive scams and schemes.
- Ensuring audit fairness and protecting all taxpayers from a variety of scams and schemes. While IRS compliance work will be increasing on the wealthy, scammers and fraudsters frequently target average taxpayers with more modest incomes, so the IRS will be focused on raising consumer awareness on these issues.
- Improved equity in audits. The IRS continues to focus on making improvements in audits involving Earned Income Tax Credits and will be implementing changes for the next filing season.
- Emerging scam issues. The IRS will continue its aggressive work warning consumers about emerging scams and schemes. Building off efforts like the Dirty Dozen, the IRS plans to warn taxpayers about quickly emerging scams. As the IRS has seen through the years, scammers frequently adjust or change their tactics to tag onto recent tax law changes or other events that can confuse taxpayers into trying to claim refunds worth thousands of dollars. This effort can touch on issues like sick leave and family leave as well as false fuel tax credit claims.
- Protection against identity theft. The IRS will continue the ground-breaking efforts of the Security Summit initiative, a joint effort between the federal government, state tax agencies and the nation’s software and tax professional communities.
Out of compliance Taxpayers Ought to Come Forward First
The new IRS compliance efforts is a reminder to taxpayers about the importance of timely filing and paying their taxes, and that there are several options available to help people having trouble paying. Moreover, taxpayers should file on time, even if they can’t pay the full amount due. Then, they should pay the rest as soon as they can. The sooner paid, the less owed in terms of added interest and penalties.
Get Started with coming into compliance. If you are out of compliance, do not wait to come forward. There are options available for non-compliant Taxpayers if the IRS does not contact you first. Consult a specialized Tax Advisor for your best option now. ©