The Internal Revenue Service (IRS) plans to continue their crackdown on top earners who have not paid their owed taxes, according to experts. IRS Commissioner Danny Werfel stated during a recent House Ways and Means Committee hearing that they are working to reverse the historically low audit rates for large corporations, complex partnerships, and high-wealth individuals.
The audit rate for taxpayers earning $1 million or more was only 0.7% in 2019, compared to 7.2% in 2011. This significant decrease in audit rates has prompted the IRS to take action, bolstered by billions in Inflation Reduction Act funding. In January, the agency reported that they had collected over $482 million from 1,600 millionaires who were delinquent on their taxes, with Commissioner Werfel mentioning that this was just the beginning.
According to tax experts, the IRS will likely focus their scrutiny on partnerships, particularly “tiered partnerships” that can provide an opaque way of hiding income. The agency is also expected to utilize data analytics and artificial intelligence to detect any potential tax evasion or discrepancies in tax reporting.
As of December, the IRS was conducting open examinations of 76 of the largest partnerships in the U.S., with average assets of over $10 billion. These examinations include hedge funds, real estate investments, publicly traded partnerships, large law firms, and more. The goal is to utilize data analytics and artificial intelligence to uncover any hidden income or potential tax evasion.
Aside from partnerships, the IRS will also be watching for other “red flags” from higher earners, such as residency in Puerto Rico, international tax evasion, and cryptocurrency transactions. Additionally, estate and gift tax returns using aggressive valuation discounts for assets may face increased scrutiny to ensure accurate reporting.
Furthermore, the IRS will also heighten audits on traditional issues, such as individuals reporting business income on Schedule C or using passive losses to offset certain types of business income. Tax experts anticipate that the IRS will closely monitor these areas to ensure compliance and accurate reporting of income and deductions.
It is evident that the IRS is ramping up their efforts to crack down on top earners who have not paid their owed taxes. By increasing audit rates, focusing on partnerships, and utilizing data analytics and artificial intelligence, the agency aims to close the tax gap and ensure that all taxpayers are fulfilling their tax obligations. Taxpayers, especially high earners, should be prepared for increased scrutiny and ensure that their tax returns are accurate and compliant with tax laws to avoid penalties and fines.
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