On September 8, 2023, the IRS announced the start of a “sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promotors abusing the nation’s tax laws.” (IR-2023-166) The timing of this announcement at the beginning of the 2024 election cycle is, of course, just coincidental.
With funding from the Inflation Reduction Act, the IRS intends to focus enforcement efforts on “[the] wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade.” The announcement states the IRS will use artificial intelligence and improved technology to “help 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.”
Who Will Be Targeted for Investigation?
A primary target of the increased collection efforts will be taxpayers with total positive income in excess of $1 million who have more than $250,000 in tax debt. The IRS has identified approximately 1,600 high-income taxpayers who meet the criteria.
The Large Partnership Compliance program will be upgraded using “cutting-edge machine learning technology to identify potential compliance risks in the areas of partnership tax.” According to the announcement, the IRS has identified several large partnerships to examine. Notification of these audits are to be sent to those partnerships by September 30, 2023, according to the announcement. Further, the IRS will be sending compliance letters to 500 additional partnerships requesting information regarding potential non-compliance with tax reporting requirements.
The announcement lists several “priority areas” for compliance efforts, including digital assets, FBAR violations and labor brokers. Regarding “labor brokers,” the announcement states “[t]he 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 with 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.”
Taxpayers with federal tax compliance issues, particularly high net worth individuals, large partnerships, and construction contractors, need to contact a tax attorney with experience with IRS compliance initiatives to consider options for reporting non-compliance. This should be done before receiving a notice of audit from the IRS. Taxpayers who voluntarily disclose their non-compliance to the IRS before being selected for audit and taking advantage of one of the IRS compliance programs, will generally find themselves in a better situation than going through an IRS audit.