On September 8, 2023, the Internal Revenue Service ("IRS") unveiled an ambitious plan to revamp tax compliance and promote fairness in taxation. This initiative marks a historic shift, with a primary focus on high-income individuals, partnerships, large corporations, and those who exploit the nation's tax regulations. Bolstered by the financial support allocated through the Inflation Reduction Act, the IRS will concentrate its resources on scrutinizing the tax affairs of affluent taxpayers and leveraging cutting-edge technology, including Artificial Intelligence, to identify instances of tax evasion and potential compliance breaches.

IRS Commissioner Werfel’s Focus on Wealthy Taxpayers

Commissioner Werfel recently expressed his views on focusing IRS compliance efforts on wealthy taxpayers:

“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said IRS Commissioner Danny Werfel. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.”

“The nation relies on the IRS to collect funding for every critical government mission -- from keeping our skies safe, our food safe and our homeland safe. It’s critical that the agency addresses fundamental gaps in tax compliance that have grown during the last decade,” Werfel added. “There is a sea change taking place at the IRS in every aspect of our operations. Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse. We will increase our compliance efforts on those posing the greatest risk to our nation’s tax system, whether it’s the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation’s tax system.”[1]

‍Expanded Compliance Efforts Focused on High-Income/High-Wealth Taxpayers and Partnerships

According to the IRS news bulletin, the IRS is directing its attention toward high-income taxpayers and employing Artificial Intelligence to emphasize scrutiny of large partnerships:

Prioritization of high-income cases. In the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.

Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI). The complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues and apply resources accordingly. In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population. The IRS is now expanding the LPC program to additional large partnerships. With the help of AI, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. By the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent across section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.[2]

‍Digital Assets and FBAR Violations in FY 2024

Furthermore, the IRS is embarking on several compliance initiatives designed to tackle specific challenges, such as digital assets like cryptocurrency and violations related to the Foreign Bank and Financial Accounts Report (FBAR):

Expanded work on digital assets. The IRS continues to expand efforts involving digital assets, including work through the John Doe summons effort and last month’s release of proposed regulations of broker reporting. The IRS Virtual Currency Compliance Campaign will continue in the months ahead after an initial review showed the potential for a 75% non-compliance rate among taxpayers identified through record production from digital currency exchanges. The IRS projects more digital asset cases will be developed for further compliance work early in Fiscal Year 2024.

More scrutiny on FBAR violations. High-income taxpayers from all segments continue to utilize Foreign Bank accounts to avoid disclosure and related taxes. A U.S. person with a financial interest over a foreign financial account is required to file a Report of Foreign Bank and Financial Accounts (FBAR) if the aggregate value of all foreign financial accounts is more than $10,000 at any time. 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.[3]

For a complete review of the IRS’s new compliance efforts, click here.

Conclusion

The recent IRS announcement shouldn't catch taxpayers off guard. Many of the highlighted focus areas have been ongoing concerns for quite some time, although they haven't received as much public attention as topics like conservation easements and micro-captive insurance arrangements. Nevertheless, individuals with substantial income ($1 million+ per year), digital assets, or offshore holdings should anticipate increased scrutiny and intensified compliance initiatives in the foreseeable future.

At Provident Financial Planning, our JD, CPA, CFP® team is here to guide you through your federal taxes from planning to preparation of your annual income tax returns. Schedule an appointment with us today over Zoom or in any of our offices in Southlake, Plano, Dallas, Houston, or Atlanta. Our team can help you implement a tax strategy tailored to you.

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Keywords: federal tax, tax plan, strategy, tax return, high-net-worth, wealth, taxpayer, digital asset, IRS, audit

[1] IRS, IR-2023,166 (Sept. 8, 2023).

[2] IRS, IR-2023,166 (Sept. 8, 2023).

[3] IRS, IR-2023,166 (Sept. 8, 2023).

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