IRS Shifts Enforcement Policy to Higher-earning Taxpayers, Corporations, Partnerships and ‘Abusive’ Schemes

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The Inflation Reduction Act of 2022 included $80 billion in additional funding for the IRS, of which a little more than half is earmarked for enforcement. After the law’s passage, rhetoric quickly arose in the political sphere about armies of IRS auditors pursuing middle-class taxpayers and small business owners who may not have the resources to fight tax audits.

But the IRS says nothing of the sort will happen. First, the funds will be appropriated over 10 years, so additional enforcement will occur in increments. Moreover, much of the additional funding will pay for replacing enforcement personnel who have left the IRS or are scheduled to retire over the next several years.

Most notably, the IRS has announced that it is shifting its enforcement focus away from taxpayers with incomes under $400,000 to wealthier taxpayers, as well as corporations, partnerships and promoters of abusive tax schemes.

The IRS announced recently it had conducted an extensive review of its enforcement activities and will begin implementing new technology, including artificial intelligence (AI) tools, to focus on high-earning taxpayers and better protect earned income tax credit claimants from unfair scrutiny and identity theft.

The new funding and shift in enforcement policy follows more than a decade of budgetary appropriations that fell short of the IRS’s needs. From 2011 to 2021, the IRS’s budget grew by 9%, or less than 1% annually, at a time when the inflation rate averaged nearly 2% per year. During that time the IRS lost thousands of experienced personnel and survived on outdated technology, even as tax laws became more complex and the annual “tax gap” – the difference between taxes owed and taxes paid on time – grew by nearly 40%.

The years of underfunding led to the lowest audit rate of wealthy tax filers in history, according to IRS Commissioner, Danny Werfel.

The IRS’s enforcement expansion projects include:

• contacting taxpayers with incomes over $1 million and more than $250,000 in recognized tax debt, with particular focus on 1,600 taxpayers who collectively owe hundreds of millions in taxes.
• using AI to open examinations of the 75 largest partnerships in the country that have, on average, more than $10 billion in assets each.
• issuing compliance letters to high-risk partnerships with more than $10 million in assets, beginning immediately with 500 taxpayers.
• other priority areas to be addressed in 2024 include digital assets, foreign bank and financial accounts violations, and a scheme involving construction contractors making Form 1099-MISC and Form 1099-NEC payments to shell companies.

Much of the IRS’s plan for upgrading enforcement is adapted from a 2021 report published by the Treasury Department called The American Families Plan Tax Compliance Agenda, a blueprint for modernizing the IRS.

The IRS stresses that law-abiding taxpayers who file and pay their taxes on time have nothing to be concerned about, and that its enforcement modernization efforts are a response to changing technology, increasing tax non-compliance and a rise in abusive tax schemes.

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If you would like to discuss tax planning and the IRS’s new enforcement tools, JLK Rosenberger can help. For additional information, call us at 949-860-9895, or click here to contact us. We look forward to speaking with you soon.