The Internal Revenue Service plans to intensify its work on accounts of high-income taxpayers, and will increase its use of artificial intelligence on large partnerships. The IRS said it will also ensure audit rates will not increase for those earning less than $400,000 a year.The agency’s announcement stated that audit rates for those receiving the Earned Income Tax Credit remain high, "while rates dropped precipitously for those with higher income, partnerships, and others with more complex tax situations."
The IRS outlined its plans to initiate work in contacting 1,600 high-income taxpayers, 500 large partnerships believed to be underreporting, and to conduct open examinations of 75 large partnerships.
Furthermore, the IRS intends to introduce new fairness safeguards for those claiming the EITC. This includes efforts to ensure that unscrupulous tax preparers do not exploit individuals claiming these credits. As part of its High Wealth, High Balance Due Taxpayer Field Initiative, the IRS "will intensify its efforts on taxpayers with total positive income above $1 million who have more than $250,000 in recognized tax debt."
Highlighting that it has collected $38 million from more than 175 high-income earners, the IRS revealed its plan to assign dozens of Revenue Officers to focus on such cases. This year, the IRS will contact approximately 1,600 taxpayers who "owe hundreds of millions of dollars in taxes."
In 2021, the IRS initiated the first stage of its Large Partnership Compliance program, scrutinizing some of the largest and most complex partnership returns. This program is expanding, using AI to select returns for examination. By the end of this month, the agency will assess 75 large partnerships "representing a cross-section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries. On average, each of these partnerships holds more than $10 billion in assets."
Additionally, the IRS has identified ongoing discrepancies in the balances of partnerships with more than $10 million in assets, with disparities of millions of dollars between end-of-year and beginning-of-year balances for the following year. These discrepancies are on the rise. The IRS announced plans to investigate those who fail to file the required statements explaining these differences.
The IRS has allocated the necessary resources and has a plan in place to enhance this effort, commencing in early October when the IRS will begin mailing notices to around 500 partnerships. These partnerships may be added to the audit stream, depending on their responses.
The IRS will focus on areas favored by high-net-worth individuals, including the following:
Digital assets: An analysis of the IRS Virtual Currency Compliance Campaign revealed a potential 75-percent non-compliance rate among those identified through records of digital currency exchanges. The IRS expects to develop more digital asset cases for further compliance work early in Fiscal Year 2024.
FBAR Violations: IRS analysis of multi-year filing patterns for individuals required to file a Report of Foreign Bank and Financial Accounts has identified hundreds of possible non-filers with account balances averaging over $1.4 million. The IRS plans to audit the most egregious potential cases in the current fiscal year.
Labor Brokers: The IRS has uncovered instances in which construction contractors make Form 1099-MISC/1099-NEC payments to an apparent subcontractor, which is actually a shell company. These payments are eventually returned to the original contractor—an abuse seen in Texas and Florida. The IRS is expanding its efforts in this area with civil audits and criminal investigations. Depending on the responses received, the IRS will include these cases in the audit stream for further examination.
