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The IRS has recently unveiled a significant tax enforcement initiative aimed at enhancing its oversight of high-income earners, partnerships, and individuals with foreign bank accounts. The agency’s objective is to “restore fairness to the tax system” by concentrating on affluent taxpayers who have witnessed substantial declines in audit rates over the past decade.
Targeting High Earners with Tax Debts
At the heart of the IRS’s crackdown are individuals who report annual incomes exceeding $1 million and have outstanding tax debts exceeding $250,000. The agency, in its announcement dated September 8, disclosed that it has identified approximately 1,600 taxpayers meeting these criteria, with a combined tax debt amounting to hundreds of millions of dollars. The IRS outlined its intentions to deploy specialized revenue officers dedicated to the collection of taxes from these high-income delinquent accounts, commencing in fiscal year 2024. For those falling within this category, it is expected that the IRS will initiate enforcement actions as early as next year.
This development comes on the heels of a substantial injection of funds into the IRS budget through the Inflation Reduction Act. The agency has asserted that the additional funding will be used to recover more from affluent tax evaders while keeping audit rates low for individuals earning less than $400,000 annually. Another key objective is to reduce or limit audits for moderate- and low-income taxpayers claiming the Earned Income Tax Credit (EITC).
AI-Powered Audits for Large Partnerships
The IRS is also significantly expanding its examination of tax returns filed by large partnerships. Due to their complexity, these returns have historically overwhelmed the IRS’s resources and analytical capabilities, resulting in limited scrutiny. Additionally, audit rates for these large partnerships have declined in recent years as the IRS’s budget and workforce have shrunk. By the end of September, the agency plans to address this issue by initiating audits for 75 of the largest partnerships in the U.S., each of which has assets exceeding $10 billion. Furthermore, starting in October, the IRS will commence sending compliance notices to 500 partnerships that exhibit unexplained discrepancies in their balance sheets, which may potentially trigger audits if not addressed.
The IRS intends to employ artificial intelligence to analyze these intricate returns, utilizing machine learning to identify irregularities and more effectively target non-compliant returns for audits. This approach is expected to optimize the efficient use of the IRS’s limited examination resources for detailed evaluations of complex partnership returns.
Enhanced Enforcement on Foreign Financial Accounts
The IRS is also expanding its enforcement efforts in cases of failure to report foreign bank and financial accounts. U.S. law mandates the filing of a Foreign Bank Account Report (FBAR) separately from the tax return for individuals holding over $10,000 in offshore accounts. The IRS has identified discrepancies in filings that indicate potential non-compliance among hundreds of taxpayers with average account balances exceeding $1.4 million. The agency plans to conduct audits for the most serious FBAR offenders in 2024.
If you possess foreign accounts or assets, it is crucial to pay close attention to FBAR filing obligations. The IRS intends to employ more advanced methods to detect unreported foreign holdings, and penalties for willful failure to disclose required information can be substantial.
In Conclusion
The IRS is intensifying its enforcement measures directed at high-income taxpayers and large partnerships that have seen declining audit rates over the past decade. If you earn more than $1 million annually, have interests in major partnerships, or maintain foreign financial accounts, you may come under the IRS’s scrutiny. Even taxpayers who have previously evaded audits may now attract attention from a better-resourced IRS. Consequently, seeking qualified tax advice, proactively adhering to compliance requirements, and promptly, accurately, and comprehensively addressing any IRS notifications are essential steps to minimize potential penalties and interest.
