IRS Shifts Its Priorities and Compliance Efforts on High-Income Earners, Digital Assets

On September 8, 2023, the Internal Revenue Service (“IRS”) announced that it would initiate a “sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation’s tax laws.” By utilizing new funding from the Inflation Reduction Act, the IRS will focus its efforts on the wealthy and high-income earners and utilizing new technology and Artificial Intelligence to detect tax cheating and compliance threats.

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IRS Commissioner Danny Werfel 

Commissioner Werfel shared various thoughts on the IRS’s new compliance efforts:

“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 IRS Commissioner Danny Werfel. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.” 

“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. “There is a sea change taking place at the IRS in every aspect of our operations. Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse. We will increase our compliance efforts on those posing the greatest risk to our nation’s tax system, whether it’s the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation’s tax system.”[1]

Expanding Compliance Efforts for High-Income/High-Wealth Taxpayers and Partnerships

According to the IRS news bulletin, the IRS will focus its efforts on high-income taxpayers, as well as utilize Artificial Intelligence to focus on large partnerships:

Prioritization of high-income cases. In the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than$250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.

Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI). The complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues and apply resources accordingly. In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population. The IRS is now expanding the LPC program to additional large partnerships. With the help of AI, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. By the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent across section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.[2]

Focusing on Digital Assets and FBAR Violations in FY 2024

Additionally, the IRS is launching various compliance efforts to address specific issues like digital assets (e.g., cryptocurrency) and FBAR violations:

Expanded work on digital assets. The IRS continues 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.The IRS Virtual Currency Compliance Campaign will continue in the months ahead after an initial review showed the potential for a 75% non-compliance rate among taxpayers identified through record production from digital currency exchanges. The IRS projects more digital asset cases will be developed for further compliance work early in Fiscal Year 2024.

More scrutiny on FBAR violations. High-income taxpayers from all segments continue to utilize Foreign Bank accounts to avoid disclosure and related taxes. A U.S. person with a financial interest over a foreign financial account is required to file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of all foreign financial accounts is more than $10,000 at any time. IRS analysis of multi-year filing patterns has identified hundreds of possible FBAR non-filers with account balances that average over $1.4 million. The IRS plans to audit the most egregious potential non-filer FBAR cases in Fiscal Year 2024.[3]

Fora complete review of the IRS’s new compliance efforts, click here.

Conclusion

The IRS’s recent announcement should not come as a shock to taxpayers. Many of the areas of focus noted above have been lingering issues for years, but they have not garnered as much public attention (unlike conservation easements and micro-captive insurance arrangements). However, those individual taxpayers who have high income levels, digital assets, and/or assets held overseas should expect higher scrutiny and compliance efforts in the days and years ahead.

Contact Provident Legal Counsel today to discuss your federal tax situation with a dual-credentialed attorney and CPA. Schedule a Consultation, email us at info@providentcounsel.com, or call (214) 432-6100.

[1]IRS, IR-2023,166 (Sept. 8, 2023).

[2] IRS,IR-2023,166 (Sept. 8, 2023).

[3] IRS,IR-2023,166 (Sept. 8, 2023).

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