IRS focuses on ‘complex pass-through entities’ utilized by high earners.
The IRS has announced the establishment of a new division that will specifically target “pass-through” entities, with the aim of holding the wealthiest tax filers in America accountable. This move is part of the agency’s efforts to ensure that high-income individuals pay their fair share of taxes.
Understanding Pass-Through Entities
A pass-through entity is a type of business that does not pay taxes on its revenues. Instead, the income is passed on to the owners, who then file taxes based on their individual tax rates. This structure helps business owners avoid double taxation, where income is taxed at both the business and individual levels.
The IRS plans to establish a special division that will focus on large or complex pass-through entities. According to a press release, this division will be dedicated to ensuring compliance among high-income individuals who utilize pass-through arrangements.
Targeting the Wealthy
The IRS acknowledges that pass-through entities are frequently used by higher-income groups and can involve complex tax arrangements. IRS Commissioner Danny Werfel emphasizes that this new division is part of their broader effort to ensure that the wealthiest taxpayers pay the full amount they owe.
The agency intends to leverage funding from the Inflation Reduction Act to disrupt any attempts by large partnerships to use pass-through entities to shield income and avoid taxes. The goal is to end the era of historically low error rates for wealthy and large entities.
Concerns and Scrutiny
However, there are concerns that targeting pass-through entities may inadvertently impact small business structures like sole proprietorships and partnerships. The IRS has not clearly defined what it considers “wealthy,” raising questions about potential targeting of working-class American businesses.
Furthermore, the IRS has faced criticism for its focus on low-income earners in individual filings. A report by Syracuse University’s Transactional Records Access Clearinghouse (TRAC) revealed that the IRS tends to pursue more low-income groups compared to billionaires and millionaires.
The report highlights that low-income wage earners have the highest audit rates, despite not accounting for the most underreporting. The IRS has historically targeted them due to the ease of conducting correspondence audits without sufficient resources to assist taxpayers.
The Pass-Through Unit and Funding
The new pass-through unit will be housed within the IRS Large Business and International (LB&I) division. It is expected to begin operations in the near future, with work involving pass-through areas intensifying in the meantime.
The unit will consist of LB&I employees and those from the Small Business/Self Employed division. The IRS will collaborate with the National Treasury Employees Union (NTEU) on this initiative.
The establishment of the pass-through unit is made possible by the funding received from the Inflation Reduction Act. This act provided the IRS with $80 billion in funding, although it faced opposition from GOP lawmakers concerned about potential targeting of middle-income Americans and small business owners.
Ultimately, the funding was reduced by $20 billion during negotiations between Republicans and Democrats.
How does targeting pass-through entities help in ensuring fairness and transparency in the tax system?
Ities to avoid paying their fair share of taxes. By focusing on this specific group, the IRS aims to close any gaps or loopholes that may exist in the tax system, while also sending a strong message to the wealthiest taxpayers that they are being closely monitored.
The new division will be responsible for conducting audits, examinations, and investigations into pass-through entities, with a particular emphasis on those owned by high-income individuals. This will include reviewing the accuracy of reported income, deductions, and credits, as well as identifying any instances of abusive or illegal tax practices.
Ensuring Fairness and Transparency
By targeting pass-through entities, the IRS is working to ensure that the wealthiest taxpayers in America pay their fair share of taxes. Despite lower tax rates for businesses compared to individuals, some high-income individuals may still be able to exploit loopholes and deductions to minimize their tax liabilities. This not only undermines the fairness of the tax system but also places a greater burden on middle and lower-income taxpayers.
The establishment of the new division reflects the IRS’s commitment to promoting transparency and fairness in the tax system. Through increased scrutiny and enforcement, the agency hopes to close any gaps that allow high-income individuals to avoid their tax obligations. This will ensure that all taxpayers, regardless of their income level, contribute their fair share towards funding public services, infrastructure, and social programs.
Enhancing Tax Compliance
Targeting pass-through entities is a strategic move by the IRS to enhance tax compliance among wealthy individuals. Given the potential complexity of pass-through arrangements, it is crucial that the IRS has dedicated resources and expertise to effectively address any non-compliance issues. This division will work in conjunction with other IRS units to share information, conduct coordinated investigations, and ultimately enforce tax laws.
The establishment of this new division is not only crucial for improving tax compliance but also for fostering public confidence in the fairness of the tax system. When high-income individuals are held accountable and pay their fair share, it reinforces trust in the government and promotes a sense of fairness and equity among all taxpayers.
Conclusion
The IRS’s announcement of the establishment of a new division specifically targeting pass-through entities represents a significant step towards promoting fairness and transparency in the US tax system. By focusing on high-income individuals who use pass-through arrangements, the agency aims to ensure that the wealthiest taxpayers pay their fair share of taxes, closing any gaps or loopholes that may exist. Through increased scrutiny, audits, and enforcement, the IRS intends to foster tax compliance, enhance transparency, and uphold the principles of fairness and equity among all taxpayers.
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