IRS strengthens resources to combat tax evasion in partnerships and high-income earners.
The IRS is Cracking Down: New Hires, Technology, and a Division Targeting Business Entities and Private Citizens
The Internal Revenue Service (IRS) is ramping up efforts—with new hires, improved technological capabilities, and a new division—to target business entities and private citizens and hold them “accountable” to the agency.
On Sept. 15, the IRS announced over 3,700 employee positions available for tax enforcement work focusing on high-income earners, complex partnerships, and large corporations spread over 250 locations nationwide.
The agents will be hired for “specialized technical positions that generally focus on audits” with an average pay of almost $125,000 and total compensation, including benefits, of approximately $175,000. In total, 3,700 employees will cost the American taxpayer nearly $650 million in the first year, which is not an issue as agency coffers are brimming from a recent congressionally-mandated infusion of $60 billion in new funding. New funds have enabled the IRS to hire close to 90,000 staffers, a decade-high for the tax agency.Related Stories
IRS Commissioner Danny Werfel assured Americans that the new hires will be “focused on higher-income and complex tax areas like partnerships, not average taxpayers making less than $400,000,” however a watchdog report recently revealed that the agency does not have a clear definition of “high-income,” failing which, the no-targeting-under-$400,000 claim is suspect.
“The IRS does not have a unified or updated definition for individual high-income taxpayers,” and the agency uses the term vaguely and differently based on various IRS programs, and the target filing population, claimed the watchdog.A New Division
On Sept. 20, the IRS announced a new division targeting “pass-through” entities, which the agency claims will hold America’s wealthiest tax filers accountable.
Pass-through entities—general partnerships, sole proprietorships, limited partnerships, limited liability partnerships, limited liability companies, and S Corporations—are businesses that do not pay tax on their revenues. Instead, income is passed on to business owners, who file taxes based on their individual tax rates. Pass-through entities help proprietors avoid the issue of double taxation when the income is taxed at the business level, and then at the individual level when they receive dividends.
“This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe,” said Mr. Werfel, with operations expected to begin sometime late next year.
Though the IRS claims they will target pass-through entities in a bid to hold the wealthy accountable, the fact that such entities include small business structures like sole proprietorships and partnerships has raised concerns about working-class American businesses being potentially targeted by the agency.AI Assisting IRS
Besides adding on human resources, the agency is undergoing “a sea change taking place at the IRS in every aspect of our operations,” claims the commissioner, pointing to the deployment of artificial intelligence (AI) in operations.
On Sept. 8, the IRS announced a “sweeping, historic” change involving the introduction of AI and enhanced technological prowess in assisting tax agents to “detect tax cheating, identify emerging compliance threats and improve case selection tools.” All initiatives are assisted by the 2022 Inflation Reduction Act (IRA) funding boost.
IRS’ AI initiative is said to focus efforts on complex tax structures and large partnerships. The agency admitted that audit rates for high-earning categories had seen “sharp drops” over the past decade.
“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 a cross 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,” said the agency.
As part of integrating AI, the IRS announced “expanded chatbot technology to help quickly answer basic questions for people receiving notices about possibly underreporting their taxes” on Sept. 26.The agency claims that since the beginning of 2022, chatbot services have assisted over 13 million taxpayers in avoiding wait times by providing tax resolutions.
In each development announcement, the agency makes a point of reiterating their stance that all new initiatives are focused on countering tax evasion efforts by high-earners.The Actual Targets
In the September press release regarding AI, the agency notes, “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 tax agency said that it plans to have dozens of agents focusing on “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.”
However, an audit of IRS actions reveals a different story. The agency is already under scrutiny for targeting low-income earners in individual filings. A January report by Syracuse University’s Transactional Records Access Clearinghouse (TRAC) said that the IRS follows a trend of pursuing more low-income groups compared to billionaires and millionaires.During fiscal year 2022, millionaires “did have the highest odds of being audited. However, if one ignores the fiction of auditing a millionaire through simply sending a letter through the mail, the odds that millionaires received a regular audit by a revenue agent (1.1 percent) was actually less than the audit rate of the targeted lowest-income wage-earners whose audit rate was 1.27 percent!” the report said.
The rate of income tax audits per 1,000 individuals stood at 12.7 for the lowest-income wage earners and 2.3 for everyone else. This made low-income wage earners the taxpayer class with, by far, the highest audit rates—clocking around five and a half times more than everyone else.
The report notes that low-income wage earners have historically been targeted by the IRS, not because they account for the most underreporting, but because they are seen as “easy marks in an era when IRS increasingly relies upon correspondence audits yet doesn’t have the resources to assist taxpayers or answer their questions.”Small Business and Digital Assets
Earlier this year, the IRS proposed eliminating certain tax shelters, which are used by small businesses.
Known as “micro-captive transactions,” these types of insurance arrangements allow small businesses to benefit from tax breaks via creation of insurance companies—captive insurance companies—to cover potential losses or liabilities.
The agency proposed listing these insurance arrangements as “listed transactions” or abusive tax transactions.
Even if tax law allows businesses to create “captive” insurance companies to protect against insurance risks, the agency claims these are “abusive tax shelters.”
Regarding digital asset taxation, the IRS plans on increasing scrutiny of digital currency exchanges, crypto transfers, trading platforms, and related payment processors.
“We need to make sure digital assets are not used to hide taxable income, and the proposed regulations are designed to provide a clearer line of sight into activities by high-income people as well as others using them,” Mr. Werfel said in an Aug. 25 press release.Businessmen making use of foreign accounts will also come under review. When the aggregate value of all foreign financial accounts goes above $10,000 at any time, the agency requires all U.S. citizens to file a Report of Foreign Bank and Financial Accounts (FBAR).The IRS has accused high-income taxpayers of avoiding disclosure and related taxes through making use of foreign bank accounts. The agency is expected to audit numerous individuals as “IRS analysis of multi-year filing patterns has identified hundreds of possible FBAR non-filers with account balances that average over $1.4 million.”
From 2024 onwards, the IRS has demanded businesses to file Form 8300 electronically while reporting transactional receipts over $10,000.“Beginning Jan. 1, 2024, businesses must e-file all Forms 8300 if they’re required to file at least 10 information returns other than Form 8300,” said the IRS on Aug. 30. For instance, if a business files five Forms 1099-INT and five Forms W-2, they should e-file all their returns electronically for the year, including Forms 8300. If a business files less than 10 forms, excluding Forms 8300, they can opt not to e-file. The $10,000 can be in a single transaction or multiple entries.
This initiative is reportedly done to counter money laundering. Penalties are applicable in case a business has filed Form 8300 by paper even though they are required to e-file and have not secured a waiver or religious exemption.
In case of late returns, businesses should file a late Form 8300 in the same way they would a timely one. Penalties would be applicable for late filing as well.
There has been a push by the agency toward electronic filing. In August, the agency announced its “paperless processing initiative” that allows individual taxpayers to submit non-tax documents and correspondence digitally beginning next year.Gig Workers and Delinquent Millionaires
Gig workers, sole proprietors, retirees, partners, and S corporation shareholders are required by the IRS to make estimated tax payments “if they expect to have a tax liability of $1,000 or more when they file their return.”
Moreover, “Taxpayers who were paid over $600 by payment apps and online marketplaces or received any amount by payment cards could receive a Form 1099-K, Payment Card and Third Party Network Transactions, starting January 2024, for payments received in 2023. This includes anyone with a side hustle, sole proprietors, and anyone selling goods and services online. It’s important to remember that taxpayers should report their income, unless it’s excluded by law, regardless of whether they receive a Form 1099-K or any other third-party reporting document.”
In August, the agency announced the hiring of nearly 700 employees to service 42 Taxpayer Assistance Centers across the country.In the same press release, the agency issued warnings to “delinquent millionaires” exploiting tax loopholes. “IRS will continue to pursue millionaires who do not pay their taxes as the agency ramps up enforcement capabilities through the Inflation Reduction Act.”
The examples provided by the agency included high-income individuals claiming benefits in Puerto Rico who were “attempting to avoid U.S. taxation on U.S. source income” without meeting proper residence or criteria requirements in the U.S. territory.
Besides Puerto Rico, the IRS is also targeting offshore funds based in Malta, a European country located near Italy.
“IRS is working to identify taxpayers who are improperly using Malta-U.S. Treaty rules to improperly claim exemptions. Inflation Reduction Act resources will enable IRS to detect those who leverage these offshore schemes.” Conservation Easements and Public Concerns
A conservation easement preserves a property for future generations through a legal agreement between the landowner and a land trust or government agency. The agreement conserves the land and limits its use, while offering tax benefits to landowners.
The IRS is now investigating conservation easements, which have claimed tax benefits, but broken rules of the agreement through property development.
The agency claims that some taxpayers take inappropriately large deductions for easements, and, in some cases, take deductions when they’re not entitled to it.They have issued warnings against taxpayers who have developed these properties in a manner inconsistent with section 501(c)(3).
The IRS is commissioned with extraordinary federal powers to police the finances of the private citizen. Without committing to similar high levels of integrity, the agency can easily commit oversights that have severe adverse impacts on the lives of the people.
The agency has been accused of severe failings in safeguarding sensitive taxpayer information. A governmental watchdog revealed in a September report that agents and contractors received inadequate training while the agency did not make requisite changes according to the watchdog’s 2010 recommendations.In July, dozens of IRS agents armed in tactical gear raided a business in Florida, with witnesses claiming the force removed evidence from the premises in bags and boxes. The show of force received blowback from Republican lawmakers who claimed that providing the agency with more funds will result in similar scenarios.A job advertisement for IRS agents raised eyebrows and incited thousands of comments across social media when it asked for people “willing to use deadly force.” The job page has since removed the requirement.Public concern has been growing over the militarization of IRS agents. It remains to be seen whether IRS agents, new and old, will increase their efforts in investigating potential tax fraud within high-income categories or will resort to harassing the average low- and mid-income citizen with a plethora of new regulations and complicated tax rules.
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