This month, the IRS announced that it is using the long-term funding approved by Congress through the Inflation Reduction Act of 2022 to shift its attention to wealthy taxpayers in an effort to “identify sophisticated schemes to avoid taxes.”
This effort, which is being labeled a “historic effort to restore fairness in tax compliance,” comes after years of low audit rates for higher income and wealthy taxpayers. Danny Werfel, IRS Commissioner, stated that the new strategy makes good on the promise of the Inflation Reduction Act to hold wealthy taxpayers accountable “to pay the full amount of what they owe.”
According to the announcement, IR-2023-166, the IRS will leverage advanced data analytics and technology to identify discrepancies and inconsistencies in tax filings more effectively. The changes will help better “detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless ‘no-change’ audits.” In other words, the agency will be able to target audits with greater precision.
Although the IRS has not publicized all the details of its new strategy, individuals with substantial assets and complex financial situations, which the announcement suggests includes taxpayers with income above $1 million, may face a higher likelihood of audit as a result of these measures. Estate planning strategies designed to permit the tax-free transfer of wealth from generation to generation are likely to come under greater scrutiny. Anecdotally, we have seen an increase in IRS resources devoted to estate tax audits, as well.
The IRS reports that it will “intensify work” on high-end collections cases as part of the High Wealth, High Balance Due Taxpayer Field Initiative. The agency hopes to build off its earlier successes in collecting over $38 million from 175 high wealth taxpayers by focusing on these cases in fiscal year 2024, which runs from October 2023 to September 2024.
Other explicit priority areas for the IRS include partnership compliance work; expanded efforts involving digital assets, including last month’s release of proposed regulations that broaden the definition of “broker” for information reporting of digital asset dispositions; and greater scrutiny of taxpayers with foreign bank accounts, who are required to report aggregate balances of more than $10,000.