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The IRS has been busy since the passage of the Inflation Reduction Act one year ago, taking a hard look at who it has been examining and taking seriously the rhetoric from the White House to shift its focus to taxpayers who “are not paying their fair share.”
In an announcement earlier this month, the IRS revealed some of the steps that it will be taking and who should anticipate hearing from it.
Explaining its efforts in part as a re-shoring up of exams of wealthier taxpayers that saw “sharp drops” in audit rates during the last 10 years, the IRS announced that it will draw on improved technology (including AI) to help its teams detect those attempting to avoid paying taxes, and improve the process around who is selected for audit with the hope of avoiding "no-change" audits.
The IRS announced that this new effort will only impact those earning more than $400,000 per year.
The announcement revealed the following plans:
- 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,” the IRS release says. The IRS states that it has been successful already at collecting $38 million from more than 175 high-income taxpayers, and plans to contact 1,600 more taxpayers that potentially owe hundreds of millions in taxes.
- Second stage of the Large Partnership Compliance (LPC) program. Examinations of “some of the largest and most complex partnership returns” were rolled out in the past few years. Now, the IRS is expanding the LPC program to additional large partnerships, with the help of AI, and plans to contact another 75 partnerships with (on average) over $10 billion in assets that “represent a cross-section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries.”
- Compliance letters for more partnerships. The IRS has identified that many large partnerships’ (more than $10 million in assets) beginning balance sheets (Form 1065, Schedule L) do not equal the ending balance sheets from their prior year, with no explanation attached. In October, the IRS plans to contact via notices around 500 large partnerships with this concern. These may or may not blossom into tax exams, depending on the response.
What does CohnReznick think?
We expect federal and state tax enforcement to significantly expand. The IRS previously noted that it will be focusing on Employee Retention Credit refunds, and has now indicated that it will also be focusing its enforcement resources on large partnerships and higher-income individuals. Taxpayers who fall into any of the areas targeted by the tax authorities should consider contacting their tax advisor for strategizing both in terms of taking a fresh look at how they have been reporting, as well as potentially amending past returns to mitigate known risks. If you are contacted by a tax authority for an exam, we recommend consulting with advisors who are familiar with the issues and procedures to best manage your risk.
Subject matter expertise
Brian Newman
CPA, Partner, Practice Leader, Federal Tax Services
Patrick Duffany
CPA, JD, Managing Partner - Tax
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