Thanks to a dramatic increase in funding courtesy of the Inflation Reduction Act of 2022, the Internal Revenue Service recently announced several new, high-profile enforcement initiatives designed to generate significantly more tax revenue. In particular, the IRS is expanding its enforcement efforts in complex and high-wealth areas where there are significant compliance concerns, as well as in emerging areas such as cryptocurrency and digital assets.

The timing of these announcements is no coincidence. With Tax Day only six weeks away, many businesses and individuals are in the process of preparing income tax returns for 2023. The IRS wants to ensure that all taxpayers are aware of these new enforcement activities, their tax-filing obligations and the consequences of non-compliance.

High-Income Non-Filer Initiative

As explained in our previous alert, the IRS has announced a new effort focused on high-income taxpayers who have failed to file federal income tax returns. The new initiative started with compliance letters mailed to more than 125,000 individuals who have not filed one or more returns since 2017. More than 25,000 of these letters were sent to taxpayers with incomes in excess of $1 million. The rest went to taxpayers with incomes between $400,000 and $1 million. In each of these cases, the IRS has received third-party information – such as through Forms W-2 and 1099 – indicating these individuals received income but failed to file a tax return.

The IRS non-filer program has been in existence for nearly a decade, but without adequate resources and funding, enforcement efforts have historically been sporadic. With new Inflation Reduction Act funding available, the IRS now has the capacity to undertake this effort, which it calls “core tax administration work.”

The compliance letters being mailed by the IRS are formally known as CP59 Notices. The IRS estimates that about 20,000 to 40,000 letters will be mailed weekly, beginning with the filers in the highest-income categories. Individuals receiving these letters should take immediate action to avoid additional follow-up notices, higher penalties and increasingly stronger enforcement measures. Recipients of CP59 Notices should also consult with a trusted tax professional so they can quickly file their late tax returns and pay delinquent tax, interest and penalties.

Third-party information regarding the individuals subject to this initiative indicates financial activity of more than $100 billion. Because the IRS is unaware of potential credits and deductions that individuals could claim when returns are eventually filed, the amount of additional revenue to the United States Treasury that could be recovered is uncertain. Nonetheless, the IRS estimates that hundreds of millions of dollars of unpaid taxes are at issue in these cases.

Recipients of CP59 Notices who fail to respond will receive additional notices and other enforcement actions. Ultimately, this can lead to a variety of IRS compliance activity, including enforced collection, audit action and even potential criminal prosecution.

The IRS is also authorized by law to prepare a substitute tax return – called a Substitute for Return (SFR) – for a non-filer. A SFR is prepared using third-party information reported to the IRS by employers, financial institutions, and others. The SFR computes the tax, penalty, and interest owed by the taxpayer, but typically will not include any credits or deductions that the taxpayer is lawfully entitled to claim. Even if the IRS files a substitute return, the taxpayer should still prepare and file their own tax return so as to fully claim all credits and deductions to which they are entitled. When an original return is filed after a substitute return is prepared, the IRS will generally adjust the taxpayer’s account to reflect the correct tax, penalty and interest computations.

Millionaire Tax Debt Cases

Earlier this year, the IRS announced that its efforts to prioritize high-end tax collection cases were bearing fruit. The agency has assigned dozens of revenue officers to collect unpaid taxes from taxpayers with more than $1 million in income and more than $250,000 in tax debt.

Last year, the IRS collected $38 million from more than 175 high-income earners in this category. Now, the IRS is targeting about 1,600 new taxpayers that owe hundreds of millions of dollars in taxes. Revenue agents have been assigned to over 900 of these 1,600 cases and have collected more than $482 million so far.

This brings the total recovered through these new millionaire initiatives to $520 million.

Corporate Jet Initiative

The IRS has also announced a highly-targeted enforcement effort focused on the tax treatment of corporate aircraft. As part of this effort, the IRS plans to begin dozens of audits on business aircraft involving personal use. The audits will examine aircraft usage by large corporations, large partnerships and high-income taxpayers, and focus on whether the use of the aircraft is being properly allocated between business and personal trips.

The IRS will use advanced analytics to audit corporate jet usage, which has not been the subject of scrutiny by IRS auditors for years. The IRS said that aircraft usage audits could increase in the future following initial results and as the IRS continues hiring additional examiners.

“Personal use of corporate jets and other aircraft by executives and others have tax implications, and it’s a complex area where IRS work has been stretched thin,” IRS Commissioner Danny Werfel said in the news release announcing the new initiative. “With expanded resources, IRS work in this area will take off. These aircraft audits will help ensure high-income groups aren’t flying under the radar with their tax responsibilities.”

Corporate jets are often used for both business and personal trips by officers, executives, other employees, shareholders and partners. In general, the Internal Revenue Code permits a business to deduct expenses incurred in maintaining a corporate jet if used for business purposes. When there is mixed use of a corporate jet, trips must be allocated between business use and personal use and stringent record-keeping is required. Personal use of a corporate jet also typically is treated as a fringe benefit with income inclusion to the corporate executive.

This corporate jet initiative is part of the IRS Large Business and International division’s “campaign” program. Since 2017, LB&I has identified tax areas with a high risk of non-compliance and has created campaigns to focus on such issues. The corporate jet initiative is part of a larger IRS effort to ensure that large corporations and partnerships, as well as high-income individuals, are paying their fair share of taxes. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to shelter or manipulate their income to avoid taxes. The IRS is now taking swift and aggressive action to close this gap.

Crypto Experts Hired

For the past several years, the IRS has prioritized cryptocurrency and digital asset compliance. The agency continues that work with the recent hiring of two private-sector experts.

Sulolit “Raj” Mukherjee, JD, and Seth Wilks, CPA, have been hired as executive advisors. According to an IRS news release, these individuals have extensive experience in the tax and crypto industries, and will help lead IRS efforts building service, reporting, compliance, and enforcement programs focused on digital assets.

Mukherjee has been a tax executive for more than 10 years in tax compliance and tax information reporting for financial institutions and has extensive experience in the crypto industry. He joins the IRS from a private blockchain software technology company where he served as Global Head of Tax.

Wilks comes to the IRS having worked in the digital asset tax policy space for the past six years. Previously he worked extensively with tax compliance and planning issues related to multinational corporations and manufacturing, with a focus on complex supply chains, transfer pricing and cross-border transactions.

[View source.]