The Internal Revenue Service reported progress Friday on its efforts to increase its audits of large corporations, complex partnerships and high-income individuals, collecting over half a billion dollars from millionaires who didn't pay their taxes.
The agency said it's also been
"We've been working hard to ensure the 2024 tax-filing season, which begins on January 29, builds on the accomplishments of last year," said IRS Commissioner Danny Werfel during a conference call with reporters. "We know we need to do more. We remain focused on improving service to hardworking taxpayers, offering them more in-person and online resources as part of our efforts to deliver another successful tax season this year. This filing season, taxpayers and tax professionals will see additional improvements in our operations and service that will make it easier for them to prepare and file taxes."
The IRS is going after millionaires who haven't paid hundreds of millions of dollars in tax debt, with an additional $360 million collected on top of the
(See how the IRS is
"On the compliance side, as part of our transformation efforts, we've continued to increase scrutiny on high-income taxpayers as we work to reverse the historically low audit rates for large corporations, complex partnerships and high-wealth individuals that existed since before the Inflation Reduction Act was passed," said Werfel.
He summarized the IRS's approach this way: "If you are low- or middle-income or any income category, you will see improved service," said Werfel. "If you are wealthy, there will be increased scrutiny if there are tax issues. And we remain committed to following the Treasury Department's directive not to increase audit rates relative to historical levels for small businesses and households earning $400,000 per year or less."
He noted that the IRS is making progress in pursuing noncompliance among people using partnerships to avoid paying self-employment taxes: "This is aimed at partners who try to evade self-employment tax by using an exemption that applies specifically to limited partners, even though they don't qualify as such. Our work in this area using new IRA funding has helped us increase our efforts, which now includes more than 80 audits."
Werfel said the IRS has been helped by a recent
"Cracking down on these high-wealth tax evaders is especially important because self-employment taxes help fund Social Security and Medicare," said Werfel. "The average worker has these taxes automatically taken out of their paycheck, but people who are self-employed, and in this case high wealth, are supposed to pay these taxes when they file their federal return."
Partnership audits
The IRS is also continuing to scrutinize large partnerships closely to understand the complex tax structures and tax issues they present with the help of advanced technology.
"It's been exciting to see experts in data science and tax enforcement apply cutting-edge technology, including artificial intelligence, to identify potential noncompliance among these taxpayers," said Werfel.
As of December, the IRS has opened audits of 76 of the largest U.S. partnerships. "They represent a cross-section of industries that include hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries," said Werfel.
The IRS is finding plenty of accounting issues there.
"In the partnership area, we are discovering that many entities have multimillion-dollar balance sheet discrepancies," said Werfel. "That's important because such discrepancies are an indicator of potential noncompliance with their tax responsibilities. Our focus here is on partnerships with more than $10 million in assets. The number of these discrepancies has been increasing, with many taxpayers not attaching required statements of explanation."
At the end of October, the IRS sent 480 compliance alerts to taxpayers where it found such discrepancies.
Along with partnerships, large corporations have been another big focus of the IRS's compliance efforts using funding from the Inflation Reduction Act. That includes U.S. subsidiaries of foreign companies that distribute goods in this country, but leverage transfer pricing to reduce taxes on the profits generated from their U.S. activity.
"These foreign companies improperly use transfer pricing rules year after year to report losses instead of an appropriate amount of U.S. profit," said Werfel.
To crack down on this strategy, the IRS sent compliance alerts to more than 180 subsidiaries of large foreign corporations to remind them of their U.S. tax obligations and encourage self correction.
Hiring accountants
The IRS is also expanding its compliance efforts related to the biggest U.S. corporations, including hiring accountants. "Inflation Reduction Act funding is helping us expand our large corporate compliance program, which covers entities with average assets of more than $24 billion and an average taxable income of about $526 million per year," said Werfel. "Hiring new accountants has allowed us to open up 60 new audits of taxpayers in this group. As with partnerships, we're selecting these corporations for audit using a combination of artificial intelligence and subject matter expertise in areas such as cross-border issues, corporate planning and transactions."
The IRS is using the direct hiring authority it recently received to bring on board these accountants sooner than it could do under the old hiring rules, Werfel explained in answer to a question from reporters.
"What we can do with the direct hire authority is establish essentially a fast track to get qualified ... accountants on board at the IRS more quickly," said Werfel. "That doesn't mean that we don't follow all the due diligence, the appropriate background and suitability reviews. We have just engineered a process where because of how we're getting the applications in, doing the background checks and the suitability reviews, we can condense the resume review, the interview, the validation of salary and salary expectations, and get the hiring letter out if everything lines up dramatically more quickly than under the traditional approach. These programs have been highly successful in getting talented people that want to be a part of public service."
High-income individuals are another major target of the IRS's compliance efforts. "We have dozens of revenue officers focused on these high-end collection cases," said Werfel. "These efforts are concentrated among taxpayers, with more than $1 million in income and more than $250,000 in recognized tax debt. Last fall we began contacting up to 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes. We've assigned over 900 of these 1,600 cases to revenue officers, with over $482 million collected so far in this effort. This brings the total recovered from millionaires through our new initiatives to $520 million."
