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  • Writer's pictureJamal Saafir

IRS Focusing On Enforcement On Millionaires, Crypto, and Partnerships While Using AI

According to a report from Forbes, IRS Commissioner Danny Werfel has provided further details surrounding statements made last month that pertained to coming changes affecting taxpayers.

IRS Commissioner Danny Werfel

He announced a series of initiatives described as a “sweeping, historic effort to restore fairness in tax compliance.”

The changes encompass a sharper focus on high-income earners, partnerships, large corporations, and promoters abusing America’s tax laws.

Werfel describes the initiatives as a “top to bottom review of enforcement work” at the Internal Revenue Service (IRS) due to higher monetary inflow from the Inflation Reduction Act, which has greatly increased funding for the IRS, promising tens of millions of dollars in excess of its operating budget allowing for greater attention to refinement and enforcement.

Werfel pointed to high-income taxpayer cases becoming priority. Efforts to intensify work targeting high-income taxpayers with outstanding tax debt is one of the IRS’ agendas. He specified that for fiscal year 2024 the IRS has its sights set on 1,600 millionaires that owe at minimum $250,000 in recognized tax debt who will be on the receiving end of further enforcement action.

Dozens of Revenue Officers will be personally handling these high-end collection cases, said the IRS.

2023’s enforcement efforts that were focused on high-income taxpayers yielded collections of $38 million from over 175 high-income earners.

“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said Werfel. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history.”

Werfel reiterated his promise that the IRS will make sure that audit rates do not elevate for those earning less than $400,000. “Middle and low income filers,” he said, “will see no change [in audit rates] from pre-IRA historic lows.”

The new initiatives also encompass amplified investigation of high-income taxpayers who utilize foreign bank accounts to circumvent disclosure and related taxes. As part of the Bank Secrecy Act, every U.S. person with a financial interest in, or signature or other authority over, one or more foreign financial accounts with a combined value of more than $10,000 must report the account to the Treasury Department each year. You’ll hear these reports referred to as FBARs. Failing to file FBARs when you’re required to do so can result in penalties.

An IRS examination of multi-year filing patterns has revealed hundreds of possible FBAR non-filers with account balances that average upwards of $1.4 million. The IRS intends to audit what they consider to be “the most egregious potential non-filer FBAR cases” in fiscal year 2024.

Passthrough and corporate entities will be subject to the initiatives as well. In 2021, the IRS introduced the initial stage of a compliance program focusing on large, complex partnership returns. The agency is now extending that program to incorporate other large partnerships. According to Werfel, by the end of the month, the IRS will launch investigations of 75 of the largest partnerships in the U.S. The businesses being investigated, on average, have partnerships with more than $10 billion in assets each, he says.

The IRS has also flagged ongoing inconsistencies on balance sheets involving partnerships with over $10 million in assets. Those inconsistencies, the agency notes, can be a sign of potential non-compliance. In these cases, the IRS reports that taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year, and those numbers have been growing over the years without explanation.

In efforts to compel compliance for high-risk large partnerships, the IRS will distribute notices to around 500 partnerships about those inconsistencies. Based upon the responses from the partnerships, the IRS will input them into the audit stream for follow-up.

The IRS is also giving its attention to a specific kind of corporate fraud. According to the IRS, construction contractors are furnishing Forms 1099-MISC/1099-NEC to what appear on paper to be subcontractors—but the subcontractors are nonexistent. Instead, the recipient of the 1099 is a shell company with no recognized business relationship to the contractor.

The scheme, which is being observed today in Texas and Florida, allows companies to claim a deduction for money that's being paid out—despite the money being eventually returned to the original contractor. The IRS will be giving those transactions greater attention with both civil audits and criminal investigations.

Technology is also another area of focus for the Internal Revenue Service. The IRS intends to further its virtual currency compliance campaign to educate taxpayers about the seriousness of reporting income and taxable events related to virtual currency like Bitcoin. An initial review of taxpayers identified through records obtained from digital currency exchanges (including information gathered from subpoenas) has suggested the potential for a 75% non-compliance rate. The IRS anticpates there will be more digital asset cases selected for compliance work next year.

Technology is also assisting the IRS in taking these steps forward. Werfel spoke eagerly about the possibilities for artificial intelligence (AI) to allow the IRS to perform its job better. Specifically, AI is helping the IRS to recognize returns for audit in vital areas. And, he says, it means that the agency can be more effective. By investing in new analytics solutions, he said, the IRS can use technology to detect patterns, trends, and activities that they can connect to tax evasion, freeing up staff to direct their attention to other matters.

Werfel says AI and advanced technology can be exceptional tools to further tax fairness. He mentioned that the IRS has been lagging and unable to monitor the activities and structures established by high-net-worth and knowledgeable taxpayers to dodge taxes. “We have to catch up,” he says.

Werfel says, this heightened attention on high-income taxpayers, including large partnerships and corporations, should grant middle and lower income taxpayers comfort that the IRS now has the equal capability to observe the activities of those wealthy filers—something that was happening at a far less frequency due to a lack of resources.

The focus on high-income taxpayers doesn't equate everyday taxpayers being overlooked. The IRS says it will also give attention to ensuring audit fairness and shielding taxpayers from scams and schemes. Scammers and fraudsters often target average taxpayers, Werfel explains, so the IRS plans to increase consumer awareness on these issues. That includes bringing their attention to the IRS Dirty Dozen. The Dirty Dozen is a yearly list of common scams taxpayers may be confronted with. Many of these schemes escalate during tax season as people personally prepare their returns or hire entities to help with their taxes. The schemes expose taxpayers and tax professionals to the risk of losing money, personal information, data, and more.

“The IRS is on the side of taxpayers, and we will be working to protect hard-working people from scammers or fraudsters who try to use the tax system for their schemes, whether it's promising people inflated EITC amounts or tricking people into tax-related identity theft,” Werfel said. “Protecting hard-working taxpayers is a critical component to ensuring the success of the nation's tax system, and the IRS will be working throughout the fall and into the 2024 filing season to take steps to help people.”

To propel these initiatives forward, Werfel pressed upon the need for continued funding for the IRS, saying, “A well-funded IRS is better for taxpayers.”

"The tax laws are already on the books," Werfel points out. But, the IRS hasn't had the funding to adequately enforce those laws for many years. That's changing with IRA funds. “In terms of budget, we are energized by what the IRA is improving,” he says, expressing relief that the agency can make “long-overdue improvements."

The IRS has also been revving up its hiring efforts. Budget cuts, an aging workforce, and reductions of the workforce have resulted in inadequate staffing, which has contributed to less than sufficient enforcement along with a reduction in taxpayer services over the past decade. This has changed over the past several months.

Nevertheless, the IRS budget is again being argued, as Congress contends over next year’s budget. The country operates on a fiscal year— in this case, current funding for most government programs expires on Sept. 30. That means there could be a partial government shutdown if there's no agreement in Congress before the next fiscal year begins on Oct. 1.

Despite the potential of Congress avoiding a shutdown, the IRS budget could be cut. If the budget for the agency isn't sufficiently funded, “then we have to borrow from IRA to keep the lights on”, Werfel said. That means that the agency wouldn't be able to acquire long-term investments that enable them to simply get back on track. And, he says, the result is that “we will have drained modernization resources.”

And while the IRS may seem like a low priority for taxpayers, Werfel says that it's a mistake not to fund the agency.

“The nation relies on the IRS to collect funding for every critical government mission — from keeping our skies safe, our food safe and our homeland safe. It's critical that the agency addresses fundamental gaps in tax compliance that have grown during the last decade,” Werfel added.

According to the latest edition of the IRS Data Book, the IRS collects approximately $4.9 trillion in gross revenues, accounting for approximately 96% of the funding supporting the federal government's operations.

In other words, “a good, healthy tax system is absolutely critical for the success of this country”, Werfel says.

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