The IRS issued a news release today announcing a continued and more focused use of Artificial Intelligence (AI) to audit partnerships, large corporations and alleged tax shelter promoters. The news release follows Commissioner Werfel’s recent comments that “complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues.”
Continuing to build from a recent infusion of funds from the Inflation Reduction Act (IRA), the IRS will once again begin to focus on partnerships, large corporations, and other high net worth and high-income earners, all of whom have seen sharp drops in audit rates during the past decade. The difference this time? An increased use of AI. The IRS has used AI to identify 75 partnerships for audit, and those partnerships will be notified this month. Starting next month, hundreds of partnerships will receive a compliance alert from the IRS addressing ongoing discrepancies identified on their balance sheets. The IRS is using AI principally to identity partnerships with assets of over $10 billion on average and include hedge funds, real estate investment partnerships, publicly traded partnerships, and even large law firms, Commissioner Werfel noted that the IR previously lacked the resources to pursue those inconsistencies, but increased staffing due to the IRA and the use of AI are enabling the IRS to address these taxpayers.
The IRS will also refocus on its High Wealth, High Balance Due Taxpayer Field Initiative. Through that initiative, the IRS will increase its pursuit of taxpayers with income above $1 million who also have more than $250,000 in tax debt. The IRS will have dozens of Revenue Officers focusing on these high-end collection cases and hopes to contact approximately 1,600 taxpayers who collectively owe hundreds of millions of dollars in taxes.
In addition, the IRS plans to expand its investigations into digital assets, including using John Doe summons recently released proposed regulations addressing broker reporting. The IRS believes there is a 75% non-compliance rate among taxpayers using digital currency exchanges and plans to develop more digital asset cases for compliance work. The IRS has also identified hundreds of possible taxpayers who have not filed Foreign Bank Account Reports, with account balances that average over $1.4 million, and looks to continuing audit these cases. The IRS is also expanding its attention, both civilly and criminally, to instances where construction contractors are making Form 1099 payments to apparent subcontractors, but the subcontractors are shell companies with no legitimate business relationship with the contractors and the funds flow back to the original contractors.
The takeaway? It’s getting more difficult to hide from the IRS. Since the IRS is ensuring that audit rates do not increase for taxpayers earning less than $400,000, audit rates for partnerships, corporations and high-net worth individuals will see their audit rates increase. The use of Artificial Intelligence, targeted initiatives, and increased compliance staff due to IRA funds does not bode well for those taxpayers. Make sure your tax positions are solid, supported with proper legal and accounting advice, and keep your records organized and available.
Commissioner Werfel said it best: “There is a sea change taking place at the IRS” and it is “deploying new resources towards cutting-edge technology to improve…visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse” because ” [t]hese steps are critical for the future of the nation’s tax system.”
Forewarned is forearmed.
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