IRS Highlights High-Income and High-Wealth Taxpayer Enforcement Under Inflation Reduction Act Initiatives

The Internal Revenue Service (IRS) is targeting high-income and high-wealth taxpayers. Over the past year, the IRS has launched two separate initiatives focused specifically on enforcing high-income and high-wealth taxpayer compliance. It has also made clear that it is prioritizing enforcement in several areas that are of particular concern to taxpayers with substantial incomes and tax planning needs. In this article, Texas tax attorney Lawrence Brown provides an overview of the IRS’ ongoing enforcement efforts and shares some insights for high-income and high-wealth taxpayers who may be at risk of facing scrutiny.

IRS Enforcement Priorities Focus on High-Income and High-Wealth Taxpayer Compliance

The IRS highlighted several of its ongoing enforcement priorities in two recent News Releases. The first News Release, issued on August 23, 2024, identifies the following as some of the agency’s current top areas of concern:

• Abusive Partnerships – The News Release states that the IRS has recently started implementing “a new series of steps to combat abusive partnership transactions that allow aggressive taxpayers to avoid paying what they owe.” As we discussed a couple of months ago, the IRS has identified a number of “loopholes” that it is seeking to close in order to mitigate partnership-related tax avoidance.
• Large Corporations and Partnerships – The IRS is specifically targeting what it calls “large corporations and partnerships,” including, “hedge funds, real estate investment partnerships, publicly traded partnerships, [and] large law firms.” Along with assessing compliance and pursuing enforcement at the entity level, the IRS is targeting individual shareholders, partners, executives and directors as well.
• Aircraft Use – The IRS is also specifically targeting high-income and high-wealth individuals’ use of business-owned aircraft. In particular, the IRS is focusing on “whether the use of jets is being properly allocated between business and personal use.”

In a second News Release issued on September 6, 2024, the IRS touted the success of two of its broader initiatives focused on high-income and high-wealth taxpayer compliance. The first initiative, launched last fall, targets “taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt [from whom t]he IRS was previously unable to collect . . . due to a lack of resources.” However, with additional funding under the Inflation Reduction Act, the IRS has been able to collect payment from “[n]early 80% of these 1,600 millionaires with delinquent tax debt,” with total recoveries exceeding $1.1 billion.

The IRS has also collected nearly $200 million from high-income and high-wealth taxpayers under a separate initiative targeting non-filers who earn more than $400,000. This initiative is much broader in scope, with the IRS reporting that it has collected payments from nearly 21,000 of an estimated 125,000 taxpayers who fall in this category.  

All of these enforcement initiatives remain underway. The Inflation Reduction Act provided the IRS with substantial additional funding, and the IRS is using this additional funding to close the tax gap as much as possible. To do this, it is focusing on enforcement activities that are likely to have the greatest impact—which includes enforcement targeting high-income and high-wealth individuals. We expect this to remain the case through the remainder of 2024 and into 2025, meaning that high-income and high-wealth individuals who have not yet faced scrutiny from the IRS should make compliance a priority.

Insights for High-Income and High-Wealth Taxpayers

Let’s say you are a high-income or high-wealth taxpayer (or both), and let’s say you have concerns about your federal income tax compliance history. Given the IRS’s current focus on high-income and high-wealth taxpayer enforcement, what should you do? Here are some insights from Texas tax attorney Lawrence Brown:

• Now is the Time to Review Your Filing History – If you have concerns about your filing history for any reason, now is the time to take action. High-income and high-wealth taxpayers should work with experienced legal counsel to assess their compliance records and determine what steps (if any) are necessary to avoid facing dangerous scrutiny from the IRS.
• U.S. Taxpayers Must Consider All Income from All Sources Worldwide – Many high-income and high-wealth individuals earn various forms of income around the world. Under the Internal Revenue Code, U.S. taxpayers must report their worldwide income from all sources, and failure to report income reported by third parties (i.e., foreign banks) is a common trigger for audits and investigations.
• Income Tax Compliance Isn’t the Only Concern – When it comes to avoiding dangerous scrutiny from the IRS, income tax compliance isn’t the only concern. For example, if you have offshore accounts or other offshore holdings, you may have an obligation to report these holdings to the IRS or the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) or both.
• A Proactive Approach is Almost Always Best – While there are a variety of ways to defend against IRS audits and investigations, a proactive approach focused on avoiding scrutiny is almost always best. Depending on the circumstances at hand, taking a proactive approach could involve submitting a voluntary disclosure, submitting a streamlined filing, or seeking a settlement agreement or offer in compromise. Even these are just examples.
• IRS Audits and Investigations Can Lead to Substantial Penalties – Why is a proactive approach usually best? There are two main reasons. First, resolving any issues with the IRS proactively is generally more cost-effective, and it also provides certainty. Second, IRS audits and investigations can lead to substantial penalties. Civil penalties can be up to 25 percent of the amount owed, while criminal penalties can include both fines and federal imprisonment. Although civil penalties begin to accrue immediately, a proactive approach allows for mitigation of these penalties while also reducing (if not eliminating) any risk of criminal prosecution.

Request an Appointment with Texas Tax Attorney Lawrence Brown

At Brown Tax, P.C., our practice is devoted to representing high-income and high-wealth taxpayers in significant federal tax controversies. If you have concerns about facing scrutiny from the IRS, we invite you to get in touch. To request an appointment with Texas tax attorney Lawrence Brown, please call 888-870-0025 or contact us online today.