IRS Releases Strategic Operating Plan Update Highlighting New Enforcement Priorities

The Internal Revenue Service (IRS) recently released its annual update to its Strategic Operating Plan. While several aspects of the annual update are notable, perhaps the most notable aspect is its focus on targeting high-income and high-net-worth taxpayers. In a News Release accompanying the release of the annual report, the IRS writes:

“[T]he IRS anticipates increasing audits on the wealthiest taxpayers, large corporations and large, complex partnerships by sizable percentages . . . . The IRS will increase audit rates by more than 50% on wealthy individual taxpayers with total positive income over $10 million, with audit rates going from an 11% coverage rate in 2019 to 16.5% in tax year 2026.”

According to the annual update, the IRS intends to enhance its efforts to target large corporations and partnerships as well. This includes “nearly tripl[ing] audit rates on large corporations with assets over $250 million,” and “increase[ing] audit rates by nearly ten-fold on large, complex partnerships with assets over $10 million.” Learn more about the IRS’s upcoming enforcement initiatives from Texas tax attorney Lawrence Brown:

Expanded Enforcement: One of the IRS’ Five Key Objectives for 2024 and 2025

In its annual update, the IRS identifies five “key objectives” for 2024 and 2025. While four of these objectives focus on improving taxpayer services, the fifth focuses on enforcement. Specifically, the annual update states that over the next two years the IRS will:

“Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.”

In a supplemental report released alongside the annual update to the IRS’s Strategic Operating Plan, the IRS estimates the current tax gap at $683 billion. The IRS places much of the blame on high-income and high-net-worth taxpayers who underreport their tax liability—with an estimated $542 billion of the tax gap attributable to underreporting. To address this portion of the tax gap, the annual update states that over the next two years the IRS intends to:

• Hire additional staff who are dedicated to enforcing high-income taxpayers’ and partnerships’ reporting obligations;
• Expand its ongoing efforts to enforce high-income taxpayers’ obligations with respect to cryptocurrencies and other digital assets;
• Implement strategies for “rapidly increasing enforcement activities, including non-audit activities;”
• Continue to explore “alternative interventions” to encourage voluntary compliance; and,
• Engage in “tailored, proactive outreach” when seeking to bring high-income non-filers into compliance with the Internal Revenue Code.

Enforcement Priorities Targeting High-Income and High-Net-Worth Taxpayers

To achieve its objective of enhancing enforcement with respect to high-income and high-net-worth taxpayers, the IRS intends to continue pursuing many of the priorities it has identified previously. These include the priorities identified in IRS Criminal Investigations’ (IRS CI) 2023 Annual Report released earlier this year. Moving forward, we expect to see an increase in both civil tax audits and criminal tax investigations targeting alleged violations in the areas of:

Abusive Tax Schemes

The IRS and IRS CI both regularly target high-income and high-net-worth taxpayers suspected of using abusive tax schemes to evade their federal income tax liability. These include, but are not limited to, abusive tax schemes such as:

• Illegitimate charitable deductions
• Micro-captive insurance arrangements
• Syndicated conservation easements

High-income and high-net-worth taxpayers (and their advisors) often engage in strategies that walk the line between lawful tax planning and unlawful tax avoidance. With the IRS’s new strategic plan for the future, we expect that these types of strategies will face enhanced scrutiny in the years to come.

Corporate and Partnership Tax Fraud

According to the IRS, corporate and partnership tax fraud are among the largest contributors to the current tax gap. The IRS has expressly signaled its intent to target large corporations and complex partnerships going forward, with a particular emphasis on uncovering intentional structures and strategies that facilitate unlawful tax avoidance. With additional funding under the Inflation Reduction Act, the IRS is investing in AI-based software applications and other tools that it intends to use to identify red flags for corporate and partnership tax fraud—and then it intends to investigate these red flags and pursue enforcement as warranted.

Digital Asset Tax Fraud

Digital asset tax fraud, and cryptocurrency tax fraud in particular, remains a top enforcement priority for the IRS. Underreporting remains among its top concerns, and the IRS’s annual update states specifically that the agency intends to continue—and expand—its use of John Doe summonses to identify cryptocurrency investors who have not reported their earnings on their quarterly or annual returns.

Employment Tax Fraud

Employment tax fraud is a perennial enforcement priority for the IRS, and it appears that this is not going to change any time soon. Currently, one of the IRS’s primary focuses in this area is fraud under the pandemic-era Employee Retention Credit (ERC) program. Fraud under the ERC was pervasive, and the IRS and IRS CI are now working to identify companies and individuals that claimed fraudulent credits in order to recoup taxpayer funds.

International Tax Fraud

The IRS and IRS CI are also placing particular emphasis on enforcing high-income and high-net-worth taxpayers’ international tax compliance obligations. This includes specifically, but not exclusively, their obligations to report offshore bank accounts and other foreign financial assets under the Foreign Account Tax Compliance Act (FATCA) and Bank Secrecy Act (BSA). Depending on the specific circumstances involved, audits and investigations focused on FATCA and BSA compliance can expose taxpayers to civil or criminal penalties.

General Tax Fraud

The IRS’s Strategic Operating Plan also involves focusing on what the agency refers to as “general tax fraud.” This encompasses common forms of tax evasion and tax fraud other than those discussed above. With high-income and high-net-worth taxpayers under the IRS’s (and IRS CI’s) microscope going forward, those who have any concerns about their filings should strongly consider working with an experienced Texas tax attorney to target a proactive resolution that allows them to avoid federal scrutiny.

Request a Confidential Consultation with Texas Tax Attorney Lawrence Brown

With offices in Fort Worth, we represent high-income and high-net-worth taxpayers in federal tax matters nationwide. To request a confidential consultation with Texas tax attorney Lawrence Brown, please call 888-870-0025 or inquire online today.