On September 8, 2023, the IRS announced a multitude of compliance initiatives aimed at high-income taxpayers, partnerships, digital assets, FBARs and labor brokers. According to the announcement, the IRS has finalized its “top-to-bottom review” of current enforcement efforts and intends to zero in on these matters in the near future. As expected, the impetus for change—according to the announcement—was Congress’s decision to provide the IRS with additional funding through its passage of the Inflation Reduction Act (IRA).
The IRS considers a “high-income” taxpayer as any individual who earns $400,000 or more in a tax year. The announcement reinforces the IRS long-standing promise that it will not devote any IRA funding to increase audit rates of individuals who are not high-income earners—i.e., those who make less than $400,000 a year. However, high-income taxpayers can expect some significant changes.
According to current IRS Commissioner Danny Werfel, the IRS’s underfunding in prior years resulted in “the lowest audit rate of wealthy filers in our history.” Armed now with the IRA funding, Mr. Werfel has made it known that he is “committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy.” High-income taxpayers should therefore expect a higher probability of IRS examination in the years to come.
In addition to higher examination rates, certain wealthy taxpayers (those earning more than $1 million a year) who have more than $250,000 of unpaid federal tax liabilities can expect contact from Revenue Officers in the near future. Specifically, the announcement indicates that the “IRS will have dozens of Revenue Officers focusing on these high-end collection cases” beginning in fiscal year 2024. According to the announcement, the IRS is currently aware of roughly 1,600 taxpayers who fall within the wealthy taxpayer category and who also “owe hundreds of millions of dollars in taxes.”
Partnerships will not be immune to the IRS’s new compliance efforts. More specifically, the announcement indicates that “[b]y the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries.”
Another high priority initiative of the IRS related to partnerships will be a renewed focus on tax balance sheets. According to the announcement, the IRS has already “identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets,” a potential indicator of non-compliance. Regarding these balance sheet discrepancies, the IRS stated that it intended in “early October” of 2023 to start mailing compliance letters to approximately 500 partnerships.
The IRS continues to have concerns regarding compliance rates and taxpayers who own digital assets. Specifically, the IRS noted that, based on an “initial review” of data it had, it believes only 25% of taxpayers holding digital assets were compliant with their federal income tax obligations. Accordingly, the IRS indicated in the announcement that it would continue “to expand efforts involving digital assets, including work through the John Doe summons effort and last month’s release of proposed regulations of broker reporting.”
For some time, the IRS has focused on identifying taxpayers who have failed to file timely and proper FBARs regarding their foreign financial accounts. That will not change. The announcement indicates that the IRS is already aware of hundreds of possible FBAR non-filers with account balances that average over $1.4 million due to its analysis of “multi-year filing patterns”. Thus, the IRS will designate significant resources to “audit the most egregious potential non-filer FAR cases in Fiscal Year 2024.”
The IRS recently communicated in a prior announcement that it was aware of certain schemes in which construction contractors were making payments to shell subcontractor companies and reporting the payments on Forms 1099-MISC/Forms 1099-NEC. After the shell companies receive the payments, they transfer those funds to Money Service Businesses (MSBs) or simply back to the contractor. According to the announcement, the “IRS will be expanding attention in this area with both civil audits and criminal investigations.” The IRS is already aware of these schemes taking place in Texas and Florida, but presumably is investigating these fraudulent activities in other states as well.
The IRS announcement is significant in that it provides a blueprint of IRS actions in the near- and mid-future. Although the IRS specifically identified and discussed high-income taxpayers, partnerships, digital assets, FBARs, and labor brokers, the IRS indicated that it would provide additional details on other compliance efforts “in the weeks and months ahead.” Taxpayers should recognize that this is a new IRS—one that now has significant resources and increased budgets to work with in light of funding from the IRA. Taxpayers who fall within one or more of these categories of focus should consider speaking to a tax professional to determine what actions, if any, should be taken considering the IRS’s changed compliance efforts.