New issues come into focus as the IRS focuses scrutiny on high-income taxpayers, partnerships and corporations, as well as those who promote the abuse of tax rules.  The IRS has formally given notice that it intends to refocus attention from working-class taxpayers to wealthy and high-income audit targets.

The notice, released in the past month, serves as fair warning to high-income taxpayers based upon a “top-to-bottom review of enforcement efforts.”  The IRS announced the “sweeping, historic effort to restore fairness in tax compliance” to be funded by the recent Inflation Reduction Act (IRA).  The strategy is based upon a sharp decline in audit rates for partnerships, the wealthy and corporate ownership over the past several years.  The IRS has renewed its pledge not to increase audit rates for US taxpayers who earn less than $400,000 per year and those who claim the Earned Income Tax Credit (EITC).  This is a sharp reversal of policy for the IRS as audit rates for EITC filers have been substantially high for the past decade while wealthy taxpayers witnessed a precipitous drop in audit targeting.

The IRS Will Use Artificial Intelligence and State-of-the-Art Technology to Detect and Target “Schemes”

Artificial intelligence will play a key role as the IRS focuses scrutiny on high-income taxpayers, partnerships and corporations.  The IRS has deployed artificial intelligence in past pilot programs and is increasing the use of this technology to go after specific audit targets.  Artificial intelligence and continuing investments in cutting-edge technology will enhance existing collaborative efforts between the agency and experts in “data science” as they identify areas of “potential compliance risk in the areas of partnership tax, general income and tax and accounting, and international tax.”  These are segments of US taxpayers which have not been given much of any type of focus in past years.

Focus Upon the Large Partnership Compliance (LPC) program and Partnerships with Assets Above $10 Million

The IRS intends to increase its focus upon the Large Partnership Compliance (LPC) program and those partnerships with assets above a $10 million threshold.

The “Large Partnership Compliance (LPC) program,” launched in 2021, targets many of “the largest and most complex partnership returns in the filing population.”  The IRS is expanding the LPC and will audit 75 of the “largest partnerships in the U.S.” with assets that exceed $10 billion representing many sectors such as real estate investment, hedge funds, partnerships that are publicly traded and even large law firms among other targets. 

The IRS noted “ongoing discrepancies” on the balance sheets of many of these partnerships which the agency believes to be “an indicator of potential non-compliance.”  In fact, many partnership taxpayers tax returns reflect substantial discrepancies (many in the millions of dollars) between the end-of-year balance in one tax year and the beginning balance of the following tax year.

The IRS has announced its intention to mail initial inquiries to an estimated 500 targeted partnerships here in October of 2023.

The IRA Provides the funding as the IRS Focuses Scrutiny on High-Income Taxpayers, Partnerships and Corporations

The Inflation Reduction Act (IRA) has provided the funding to increase agency resources desperately needed as the IRS focuses scrutiny on high-income taxpayers, partnerships and corporations.  The IRS continues to emphasize additional focus upon violations associated with the Report of Foreign Bank and Financial Accounts (FBAR) for those who attempt to hide income and assets in foreign institutions in an effort to avoid required reporting and ultimately increased tax exposure.  The agency reports one analysis alone identified “hundreds of possible FBAR non-filers with account balances that average over $1.4 million.” 

The IRS receives streams of data from financial institutions, sovereign tax authorities, crypto brokerages and investment houses around the world.  The IRA has provided the funds necessary to deploy state-of-the-art technology supported by artificial intelligence to comb through this data and identify potential audit targets.

The message to those who continue to evade the reporting of income and the payment of taxes to the US Treasury is simple: the IRS is coming for you.