September 12, 2023

IRS Now Targeting High Income Taxpayers & Partnerships

Over the past few years, the IRS has experienced significant difficulties processing tax returns, managing taxpayer communication, providing customer service, and maintaining review and enforcement efforts. While pandemic restrictions help to exacerbate the situation, the truth is these issues were building prior to then due to limited staffing and inadequate budgeting. To resolve the significant backlog and provide desperately needed resources, the Inflation Reduction Act, allocated an additional $80B over a ten year period. The funds were separated into four categories including enforcement, operations support, system modernization, and taxpayer services. Enforcement received the largest amount with $45.6B or a 69% increase over prior years.

On September 8, 2023, the IRS issued  a news release (IR-2023-166) detailing enforcement priorities over the coming year. Regulators will be shifting attention to high-income earners, partnerships, large corporations, and promoters taking advantage of tax laws. Specifically, the agency will target those groups that have experienced a sharp reduction in audit rates over the past decade. In addition, the IRS will also be relying on Artificial Intelligence (AI) to help detect tax cheating, compliance issues, and to improve case selection. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Expanded Enforcement Efforts

• High Income Cases – The agency will start scrutinizing taxpayers that have a total positive income of greater than $1M and have more than $250,000 in recognized tax debt. This decision was made due to earlier successes in the approach where more than $38M has been collected from 175 high income taxpayers. The goal is to target 1,600 taxpayers that currently owe hundreds of millions of dollars in unpaid tax debt.
• Intensified Partnership Focus – The agency will intensify efforts with partnerships that have discrepancies 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 tax, and international tax. By the end of the month, the IRS will open examinations on 75 of the nation’s largest partnerships including hedge funds, real estate investment partnerships, large law firms, and publicly traded partnerships.

Taxpayer Protections

Beyond just increasing scrutiny on the high-net-worth, partnerships, and others, the agency will also continue to protect taxpayers from the seemingly endless number of persistent tax scams. Protecting those with modest incomes, the IRS will continue efforts to increase awareness about these issues.

• Scams – The agency will continue warning taxpayers about common schemes and scams through efforts such as the Dirty Dozen. However, more attention will be paid to quickly providing alerts about emerging schemes. Unfortunately, scammers are very clever and use references to recently passed laws or updates to create confusion and convince taxpayers to claim refunds when not eligible. Most recently, the Employee Retention Tax Credit has been a popular target with bad actors.
• IRS Audits – The agency has committed to increasing the fairness of audits. Specifically, this includes those involving the Earned Income Tax Credits. It is expected these improvements will be implemented later this year.
• Identity Theft Protection – There will be a continuation of efforts to prevent identity theft through the Security Summit. The coalition of tax preparers, software companies, and government agencies has been effective at building internal defenses and sharing essential details that prevent bad actors from stealing a taxpayer’s identity.

Contact Us

The news of increased enforcement activities in the coming months is an important warning that high net worth and high-income partnerships should seriously consider. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1104 or click here to contact us. We look forward to speaking with you soon.