IRS Announces Plan to Target Wealthy Taxpayers and Business Partnerships
September 15, 2023
On September 8, 2023, the Internal Revenue Service (IRS) announced a “sweeping effort” to enhance its tax collection and enforcement efforts. Among other strategies, the announcement states that the IRS intends to “shift attention to wealthy from working-class taxpayers” while also placing greater emphasis on enforcing partnerships and partners’ tax obligations.
Recently, the IRS has launched a number of initiatives focused on promoting compliance while also enhancing and streamlining its enforcement capabilities. The IRS lost nearly a quarter of its enforcement budget in the decade leading up to the COVID-19 pandemic, and the Biden Administration’s efforts to expand the IRS’ operations have stalled over the past couple of years. While some of the IRS’ recent initiatives have focused on specific areas of enforcement—such as cryptocurrency and pandemic-related tax fraud—it now appears to be focusing on specific groups of taxpayers rather than specific types of tax violations.
The IRS’ Shift in Enforcement Focus to “High-Income Earners” Heading Into 2024
Where exactly will the IRS be focusing its enforcement efforts as we head into 2024? According to the IRS’s news release, the agency intends to “restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation’s tax laws.” As the IRS notes in its news release, audit rates for high-income individuals and partnerships in particular have declined substantially over the past decade. The IRS plans to reverse this trend while simultaneously relying on artificial intelligence (AI) and other tools to reduce its rate of “no-change” audits.
The IRS’ news release specifically states that it will be focusing on taxpayers who earn more than $400,000 per year. Under its new High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will also be focusing on taxpayers who have more than $1 million in income and more than $250,000 in recognized tax debt. Noting that it has recently collected $38 million from more than 175 “high-income earners,” the IRS also states that it plans to focus on “high-end collection cases”—and has specific plans to contact roughly 1,600 taxpayers who collectively owe hundreds of millions of dollars in delinquent tax liability.
Expansion of the IRS’ Large Partnership Compliance (LPC) Program
Along with targeting high-income and high-balance taxpayers, the IRS’s news release also states that the agency intends to expand its Large Partnership Compliance (LPC) program over the coming year. Launched in 2021, the LPC program was intended to enhance the IRS’s enforcement efforts targeting partnerships with more than $10 million in total assets. An IRS memorandum discussing the launch of the LPC program states that, under the program:
“Partnership returns that meet the threshold for large partnerships will be subject to data analytics and classification processes. These processes will include Subchapter K issues specific to partnerships as well as operational issues that may or may not be specific to partnerships. As more knowledge is gained from the examination of large partnerships, existing tools as well as the use of machine learning models will be leveraged to enhance identification of non-compliant returns.”
The IRS’ September 2023 news release states that the agency intends to use AI to identify large partnerships for audits and enforcement proceedings as well. Notably, the news release also states that the IRS has already identified 75 of the largest partnerships in the United States that it intends to begin auditing before the end of the year. These include hedge funds, real estate investment partnerships, law firms and partnerships in other industries. The IRS expects that its broader efforts to target large partnerships will be similarly broad in scope as well.
A Focus on Discrepancies and “High-Risk” Taxpayers
Combined with its efforts to target high-income individuals and partnerships, the IRS has also announced plans to focus on discrepancies and “high-risk” taxpayers in the coming years. The IRS’s news release describes ongoing discrepancies as “an indicator of potential non-compliance,” including specifically discrepancies between partnerships’ end-of-year balances and their beginning balances in subsequent years. The news release states that the number of these discrepancies “has been increasing over the years . . . . [and many] taxpayers are not attaching the required statements explaining the difference.”
Describing taxpayers with significant and repeated discrepancies as “high-risk,” the IRS states that it intends to focus on these taxpayers in order to “quickly” address their balance sheet discrepancies—and, in parallel, to collect any amounts owed as a result of underreporting. In its news release, the IRS states that it has already identified approximately 500 “high-risk” partnerships that it plans to contact and that it is prepared to add these partnerships to its audit portfolio depending on the responses it receives.
Dealing with the IRS During an Individual or Partnership Audit
So, what does all of this mean for high-income individuals and partnerships? The short answer is, “It depends.” For those who have prioritized tax law compliance and who are confident in the contents of their returns, it might mean nothing at all. But, for those who are behind on their federal income tax liability or who may be characterized as “high-risk” for other reasons, the risk of facing adverse consequences as the result of a targeted audit could increase significantly.
In all cases, dealing with a high-stakes IRS audit requires an informed, strategic and systematic approach. Taxpayers need to know what (if anything) the IRS is going to find, and they need to prepare accordingly. While high-stakes IRS audits can lead to substantial liability or even a criminal referral, in some cases, even at-risk taxpayers can mitigate the consequences of facing intensive IRS scrutiny with an effective defense.
Contact Brown Tax, P.C. in Fort Worth, Texas
The attorneys at Brown Tax, P.C. in Fort Worth represent high-income taxpayers in high-stakes IRS audits and investigations. If you have concerns about facing scrutiny from the IRS—whether in your individual capacity or as a business owner—we encourage you to contact us for more information. Call 888-870-0025 or inquire online to request an appointment today.