The Internal Revenue Service has made a number of recent moves signaling its resolve to shift its focus to the wealthy and away from working-class taxpayers. It intends to use Inflation Reduction Act funding to further its "major expansion in high-income/high wealth and partnership compliance work."
A key part of the effort will be centered in a new IRS group to improve tax compliance by high-income individuals and corporations. Plans for the group, a part of the IRS's Large Business and International Division, will focus mainly on the use of large or complex pass-through entities, such as S corporations and partnerships, which are used intentionally to avoid paying taxes.
"The announcement is built on the IRA funding for the service and the money that has not yet been clawed back by Congress," said Niles Elber, a member in the Washington, D.C., office of Caplin & Drysdale. "You cannot ignore the fact that the Republican side of Congress is making it a priority to pull that money, so all the plans are under that could. They're aiming at large partnerships, high-net-worth individuals with assets, FBAR issues. None of these are new, and we've been dealing with them for some time. Enforcement is a product of having the resources to go after taxpayers they don't believe are paying their taxes."
"They still theoretically have $65 billion and change, and that's a fair amount of money," he added. "When there were calls to increase the debt limit, one of the things they had to give up was enforcement. That was at least $10 billion. Every time they negotiate, Republicans — at least on the House side — say we need to restrict spending."
The Democrats may have to give a little on how far they will go, according to Elber. "What the IRS is saying is that they're bringing in an additional number — 3,700 — of revenue agents who will do examinations. It won't replace all the people who have left the IRS recently, but it makes some progress toward that, so it's a worthy effort. It's important that taxpayers and the professionals doing compliance work understand that the IRS is building back up in this area in the hope that they will pay appropriate attention."
Increased attention by the IRS will include the use of artificial intelligence, according to Colin Walsh, a principal and leader of tax advocacy and controversy services at Top 10 Firm Baker Tilly.
"The IRS has long said they are looking to audit more HNW individuals and partnerships, and now they're taking a big step toward making it a reality by using technology to enable them to do it on a significant scale," he said.
"IRS technology infrastructure has been criticized as being inadequate," he added. "The fact that they're now using AI suggests they've made leaps and bounds worth of progress in how they are addressing audits and how that perceived technology gap has been bridged. It looks like they are ready to start bringing some of the technology we have seen them use in audits of specific HNW individuals and tiered partnerships to a wider audience."
"It's important to make sure that clients understand where there are legal gray areas, and that the CPA frequently has to take positions that are in a legal gray area," he said. "All too often, clients operate under the false impression that when the CPA signs the return it means that every item on the return is something the IRS will agree with. They should understand that this is not the case, so that they don't get blindsided during an IRS exam."
It's all part of the same effort for the government to identify issues and select returns for exams, according to Walsh: "Our expectation is that at the time the exam starts, the IRS will be ready to talk about specific issues on the return. The normal opening conference starts with the basics, but if they are already looking at specific issues, it could get to the 'meat' of the issue more quickly."
"We tend to think there could be some good that comes out of this," he concluded. "The government would say that exams could get to the point more quickly, while taxpayers could spend less on professional fees."
