It is tax season once again. While the Internal Revenue Service (IRS) has extended this year’s filing deadline to May 17, 2021 for individuals, businesses must still file by April 15, and all U.S. taxpayers must ensure that when they file, they do so in full compliance with the Internal Revenue Code (IRC) and other pertinent federal laws.
Even though the individual filing deadline has been extended, and even though the COVID-19 pandemic made 2020 a year unlike any other, the IRS and its Criminal Investigations division (IRS-CI) still expect full compliance when it comes to taxpayers reporting and paying what they owe. The IRS and IRS-CI have identified several enforcement priorities for the 2021 tax season (and beyond), and they will be vigorously enforcing taxpayers’ obligations in the months to come.
“Even though the IRS has been overwhelmed recently with getting out stimulus payments and processing tax refund requests from early filers, this has not affected the agency’s enforcement efforts. The IRS and IRS-CI are continuing to target large numbers of U.S. taxpayers for tax fraud, tax evasion, and other tax-related offenses.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
11 IRS Enforcement Priorities in 2021
So, what are some of the IRS’s top enforcement priorities for 2021? Here are 11 key issues that present high risks for audits and investigations—as identified by the IRS and IRS-CI:
Abusive Return Preparers
While taxpayers who hire return preparers remain directly responsible for ensuring the accuracy of their federal returns, return preparers can also face liability when they facilitate fraudulent filings. As described by IRS-CI, “[r]eturn preparer fraud generally involves the orchestrated preparation and filing of false income tax returns,” through means including inflation of expenses, fraudulent deductions and credits, and excessive exemption claims.
IRS-CI established its Return Preparer Program (RPP) specifically for the purposes of targeting abusive return preparers. Under the RPP, IRS-CI targets not only preparers who facilitate the filing of fraudulent returns, but also individual and corporate taxpayers who conspire with abusive return preparers to submit fraudulent federal income tax filings.
Abusive Tax Schemes
IRS-CI is targeting U.S. taxpayers who engage in abusive tax schemes both related and unrelated to their annual filings. Each year, IRS-CI identifies its “Dirty Dozen”, which is a non-exclusive list of abusive tax schemes that it intends to prioritize over the ensuing 12 months. The schemes listed on the most-recent “Dirty Dozen” list, published on July 17, 2020, include:
- Phishing (particularly related to COVID-19)
- Fake charities
- IRS impersonation scams
- Social media scams
- Economic Impact Payment (EIP) and federal tax return theft
- Senior fraud
- Scams targeting non-English speakers
- Abusive return preparers
- Offer in Compromise (OIC) mills
- Fake refunds with repayment demands
- Payroll and human resources (HR) scams
With more states making the push to decriminalize or legalize recreational marijuana, the IRS has provided guidance for companies involved in the legal marijuana industry. This guidance makes clear that companies must strictly comply with all pertinent provisions of the IRC—the federal prohibition on selling marijuana (which is still classified as a Schedule I controlled substance) notwithstanding.
As companies flock to the United States’ burgeoning legal marijuana industry, the IRS is paying close attention to these companies’ annual filings. As a result, companies involved in any aspect of the industry, from cultivation to retail sale, must be careful to ensure that they comply with all relevant federal (and state) tax requirements.
The IRS is also cracking down on U.S. taxpayers who abuse the tax deductions applicable to conservation easements. On a page of its website updated on February 2, 2021, the IRS outlines some of the “abusive transactions involving charitable contributions of easements” that it will be targeting this year. These abusive transactions include:
- Taking “inappropriately large” deductions for conservation easements
- Claiming deductions for conservation easements for which taxpayers do not qualify
- Developing properties in a manner inconsistent with conservation easement restrictions
- Claiming deductions for façade easements when local ordinances prevent modification
While most IRS audits and investigations targeting abusive conservation easement deductions are likely to lead to civil penalties, criminal prosecution is a possibility. With this in mind, prior to claiming charitable deductions for conservation easements, U.S. taxpayers must ensure that they are eligible to do so, and they should ensure that the amount of their claimed deduction is appropriate.
COVID-19 Relief Tax Fraud
Along with the U.S. Department of Justice (DOJ) and various other agencies, the IRS is on high alert for all forms of fraud related to COVID-19 relief. From a federal income tax perspective, one of the most-significant issues in this arena involves improperly claiming business deductions for expenses paid with the proceeds of Paycheck Protection Program (PPP) loans.
While the IRS allows deductions for, “payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a [PPP] loan,” as a general rule PPP loan recipients cannot claim deductions for expenses paid with PPP loan funds. As a result, the IRS will be carefully scrutinizing PPP loan recipients’ returns to determine if all claimed business deductions were paid using non-PPP proceeds.
The IRS began cracking down on non-payment of federal income tax owed in relation to cryptocurrency transactions in 2019, when it sent its first round of “warning letters” to virtual currency investors. The IRS has maintained its focus on cryptocurrency-related tax compliance during the COVID-19 pandemic, and multiple additional rounds of warning letters have followed.
The IRS considers cryptocurrency to be a form of property, similar to a security. As a result, transactions involving Bitcoin and other cryptocurrencies are reportable events with potential gain or loss. This means that cryptocurrency investors must carefully track their basis and their transaction history (which many do not), and they must use this information to accurately report their income tax liability on their federal returns.
Similar to cannabis and cryptocurrency, the rise in the popularity of online gambling – spurred by legalization efforts in states around the country – has led to an increase in IRS scrutiny of gambling proceeds. IRS-CI has identified both legal and illegal gambling as enforcement priorities, and individual taxpayers, bookies, casinos, and website operators can all expect to face scrutiny if they file questionable returns.
General Corporate Fraud
It should come as no surprise that general corporate fraud remains an enforcement priority for the IRS and IRS-CI as well. Improper deductions, payroll reporting violations, and a whole host of other issues present enforcement risks for companies of all sizes. Corporations must take the steps necessary to ensure complete IRC compliance; and, when in doubt, corporate finance executives and tax department leaders must rely on the advice of the company’s professional tax advisors.
Healthcare fraud is an enforcement priority for IRS-CI as well as the DOJ, U.S. Department of Health and Human Services Office of Inspector General (DHHS-OIG), and other agencies. On the tax side, healthcare providers can face IRS scrutiny for violations ranging from improperly claiming deductions for fraudulent billings to failing to report payments received in violation of the Stark Law or Anti-Kickback Statute.
Notably, IRS-CI has identified issues such as, “nursing home fraud, chiropractic fraud, durable medical equipment fraud, staged accidents, [and] pharmaceutical diversion,” as enforcement priorities as well. In many cases, IRS-CI works with the DOJ, DHHS-OIG, and other agencies to target providers for multiple offenses in large-scale federal law enforcement investigations.
Offshore Accounts and Other Foreign Financial Assets
The IRS has made clear that it will be targeting U.S. taxpayers for violations involving offshore accounts and other foreign financial assets in 2021 and beyond. IRS-CI is also prioritizing investigations involving violations of the Bank Secrecy Act (BSA)—which establishes the FBAR filing requirement—and the Foreign Account Tax Compliance Act (FATCA)—which establishes the requirement to report most offshore accounts to the IRS.
IRS-CI’s Questionable Refund Program (QRP) is intended to, “identify fraudulent returns, to stop the payment of fraudulent refunds and to refer identified fraudulent refund schemes to be investigated and prosecuted criminally.” While taxpayers who make honest and inadvertent mistakes resulting in excessive refunds generally will not be at risk for criminal prosecution (as long as they can demonstrate that their receipt of excessive refunds was non-willful), those who intentionally file fraudulent returns resulting in excessive refunds can expect to face criminal inquiries.
Small Business/Self-Employment Underreporting and Underpayment
Finally, in 2020 the IRS established its new Small Business/Self-Employed Division, which is focusing its efforts on combating tax fraud and tax evasion in the small business sector. The Small Business/Self-Employed Division is focusing on businesses with less than $10 million in assets, as well as individuals who work as independent contractors.
While the Small Business/Self-Employed Division‘s mission is to, “small business and self-employed taxpayers understand and meet their tax obligations,” the Division is focused primarily on uncovering underreporting, underpayment, and non-filing by self-employed individuals and small businesses. As with the other IRS enforcement priorities discussed above, whether these filing errors lead to civil penalties or criminal prosecution will ultimately depend on the specific circumstances involved.