IRS Identifies Three “Priority Areas” for Enforcement in FY 2024
September 22, 2023
In a recent news release, the Internal Revenue Service (IRS) announced that it intends to shift its focus to targeting wealthy individuals and business partnerships beginning in fiscal year (FY) 2024. The news release also identifies three specific “priority areas” in which the IRS intends to focus its enforcement efforts during the upcoming year.
Two of these three priority areas are carry-overs from years past. The third, however, is new (although the IRS notes that the issue “has already been seen in Texas and Florida”). While all violations of the Internal Revenue Code and other pertinent statutes present risks for prosecution, violations involving the IRS’ priority enforcement areas can present heightened risks for both individuals and businesses.
The IRS’ Three “Priority Areas Targeted for Compliance Work in FY 2024”
The IRS’ three identified “priority areas” for FY 2024 reflect its focus on high-income taxpayers. They include (i) digital assets, (ii) foreign assets, and (iii) sham contractor-subcontractor relationships.
1. Digital Asset (Including Cryptocurrency) Compliance
The IRS (and other federal agencies) have been playing catchup since long before cryptocurrencies and other digital assets (including non-fungible tokens (NFTs)) went mainstream. As the U.S. Securities and Exchange Commission (SEC), U.S. Commodity Futures Trading Commission (CFTC) and other regulators continue to struggle to get a firm grasp on the industry, the IRS is focusing its efforts on ensuring that digital asset investors pay what they owe. It is also targeting token issuers, miners, trading platforms, and businesses that accept cryptocurrency as payment for goods and services rendered.
According to the IRS’ news release, records that it obtained from cryptocurrency exchanges “showed the potential for a 75% non-compliance rate among taxpayers.” This is a huge percentage, and it likely translates to billions of dollars in lost income tax revenue for the federal government. IRS Criminal Investigation’s (IRS CI) 2022 Annual Report released last November highlighted its enforcement efforts in this area, and IRS CI has issued several press releases highlighting its cryptocurrency enforcement cases throughout 2023.
While anonymity is often touted as one of the main benefits of investing in cryptocurrencies and other digital assets, investors’ identities are not completely obscured. The IRS has succeeded in identifying cryptocurrency investors through “John Doe” summonses issued to exchanges and other third parties. Its news release highlights these efforts, and it is likely that the IRS will continue to use this strategy in FY 2024 and beyond.
2. Foreign Asset Reporting (FBAR) Violations
The IRS’ news release also identifies foreign asset reporting violations as a “priority area targeted for compliance work in FY 2024.” Enforcing taxpayers’ obligations to report their foreign bank accounts and other foreign financial assets has been a perennial priority for the IRS—and it appears that this is not going to change any time soon. As the IRS explains:
“IRS analysis of multi-year filing patterns has identified hundreds of possible FBAR non-filers with account balances that average over $1.4 million. The IRS plans to audit the most egregious potential non-filer FBAR cases in Fiscal Year 2024.”
Most U.S. taxpayers with offshore bank accounts must disclose these accounts to the federal government annually by filing a Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Taxpayers who hold foreign bank accounts and other foreign financial assets may need to file IRS Form 8938 with their annual returns as well. Those who fail to do so can face failure-to-file penalties, while those who use their foreign holdings to evade federal tax liability can face additional penalties—and in some cases criminal prosecution—as well.
For taxpayers who have failed to disclose their offshore holdings, a proactive approach will typically be best. The IRS offers two primary options for addressing foreign asset disclosure violations—both of which provide the opportunity to avoid IRS audits and IRS CI investigations. Submitting a streamlined filing is an option for taxpayers who have inadvertently failed to disclose their offshore holdings, while voluntary disclosure is an option for those who need to take action to avoid criminal prosecution for willful violations. However, both options require a cautious approach, and taxpayers who are interested in submitting a streamlined filing or voluntary disclosure should consult with an experienced tax lawyer before doing so.
3. Sham Contractor-Subcontractor Relationships
The third priority area identified in the IRS’ news release is what the agency refers to as “labor brokers.” As the news release explains, the IRS intends to target contractors that make payments to “apparent subcontractor[s]” that are shell companies with no legitimate business operations. According to the IRS, these shell companies use money exchange businesses or multiple bank accounts to funnel money back to the contractor—while evading federal income tax liability (and potential scrutiny for immigration and labor law violations) in the process.
The IRS notes that it is specifically targeting these sham contractor-subcontractor relationships in Texas and Florida. Allegations of perpetrating tax evasion schemes can expose contractors to criminal charges carrying the potential for both substantial fines and federal imprisonment.
Efforts to target contractors (and other taxpayers) for tax evasion don’t necessarily begin with criminal investigations. In many cases, investigations flow from IRS audits that uncover discrepancies, questionable transactions and business relationships, and other red flags. As a result, all inquiries within these “priority areas” require a focused and strategic defense—particularly when taxpayers have significantly underreported or underpaid what they owe. A proactive approach is almost always best, and even if it is too late to voluntarily resolve a significant tax controversy with the IRS, working strategically with the IRS will often (though not always) lead to the best outcome.
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At Brown Tax, P.C., we represent high-asset and high-income taxpayers in significant federal tax controversies. If you need to speak with a federal tax lawyer in confidence, we invite you to get in touch. To request an appointment, please call 888-870-0025 or send us a message online today.