Earlier this month, the IRS published IR-2023-166, a news release which outlines the agency’s agenda and goals for enforcement efforts. Relying on funding allocated as part of the Inflation Reduction Act, the IRS is drastically increasing enforcement activities with high-net-worth individuals, certain partnerships, and publicly registered companies. These are all groups who have seen a sharp reduction in audit rates over the past few years. Specifically, taxpayers earning less than $400,000 per year and those claiming the Earned Income Tax Credit will not be targeted. The agency will also be relying on Artificial Intelligence (AI) to better identify inappropriate tax avoidance activities. To help clients, prospects, and others, WhippleWood CPAs has provided a summary of the key details below.
Expanded Enforcement Efforts
- High Net Worth Taxpayers – The agency will intensify work on those with a total positive income of above $1M with more than $250,000 in recognized tax debt. This is building upon an already successful approach which has seen more than $38M collected from more than 175 taxpayers. Starting in 2024, the agency will have dozens of Revenue Officers focusing on these collection cases. It is estimated the IRS will contact 1,600 taxpayers in hopes of recovering millions of dollars in outstanding tax payments.
- Intensified Partnership Focus – The agency will intensify efforts with partnerships that have discrepancies between beginning and ending balances on the balance sheet of over $10M. This is a strong indicator of potential non-compliance. These discrepancies have steadily increased over the past few years and required documentation is not being provided. Resources will be allocated to follow up with affected taxpayers, uncover the reason, and take the necessary next steps. Increased enforcement is scheduled to start in October when the IRS will be mailing around 500 partnerships to start the review process.
- Partnership Focus Using AI – The agency will expand its Large Partnership Compliance (LPC) pilot program which examines some of the largest and most complicated returns to include additional partnerships. Leveraging AI in the return selection process to fund potential compliance issues in general income and accounting, partnership, and international tax. These are all segments which have historically been subjected to limited examination coverage. It is estimated by the end of September, the agency will open examinations into the 75 largest partnerships which include hedge funds, real estate investment partnerships, large law firms, and publicly traded partnerships. These partnerships each have over $10B in assets.
2024 Priority Areas
- Additional Scrutiny of Digital Assets – The agency’s efforts with digital assets such as the John Doe Summons Programs and additional guidance and regulations will continue. The IRS Virtual Currency Compliance Campaign will also continue after initial research revealed a potential 75% non-compliance rate through records from digital currency exchanges. It is projected there will be a sharp increase in the digital asset cases opened and examined in the year ahead.
- FBAR Violations – Those high-income taxpayers that use foreign bank accounts to avoid disclosure and related U.S. taxes will be subjected to increased scrutiny. The law requires a U.S. person with a financial interest over a foreign financial account to file a Foreign Bank and Financial Accounts (FBAR) assuming the value exceeds $10,000 at any time. The agency’s analysis efforts have found hundreds of potential violators with balances exceeding $1.4M per year. In 2024, the agency will be targeting the most egregious cases of non-compliance.
It appears that enforcement efforts with high-net-worth taxpayers will increase over the coming months. However, it is likely there will be an increase in overall enforcement activities as well. If you have questions about the information outlined above or need assistance with a tax or accounting need, WhippleWood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.