IRS Announces Increased Scrutiny of High-Income Taxpayers, Partnerships, Corporations, and Promoters

On September 8, 2023, the IRS announced that it will start a “sweeping, historic effort to restore fairness in tax compliance” by focusing its attention on high-income taxpayers, partnerships, large corporations, and promoters.

The IRS’s effort is enabled by funding allocated to the agency by the Inflation Reduction Act of 2022, and it will focus on a tranche of taxpayers and entities that have seen a drastic decrease in audit rates during the past decade. The increased funding allows the IRS to improve its antiquated technology and leverage artificial intelligence (AI) to ferret out persons who are evading their federal tax obligations and to identify emerging trends of tax noncompliance. The funding is also designated to improve case selection tools so that taxpayers will not be burdened by “no change” audits and the IRS can focus its efforts on taxpayers and entities more deserving of scrutiny. Despite this newly implemented effort, the IRS stresses that audit rates will not increase for those individuals earning less than $400,000 per year.

IRS Commissioner Daniel Werfel commented that “[t]his 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.” Commissioner Werfel added that the agency “will increase [its] 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.”

In its announcement, the IRS elaborated on its expansion of high-income/high wealth and partnership compliance work, along with the designated priorities areas for targeted compliance in fiscal year (FY) 2024.

Major Expansion of High-Income/High Wealth and Partnership Compliance Work

Prioritization of High-Income Cases. The IRS will increase scrutiny on taxpayers with total positive income above US$1M that have more than $250,000 in assessed tax liability. In FY 2024, the IRS plans to have dozens of revenue officers focusing on high-income cases, expecting to contact about 1,600 taxpayers that the agency asserts collectively owe hundreds of millions of dollars in taxes.

Expansion of Pilot Focuses on Largest Partnerships Leveraging AI. In 2021, the IRS launched the Large Partnership Compliance (LPC) program, with examinations focusing on large and complex partnerships returns. In its recent effort, the IRS will expand the LPC program to additional partnerships, leveraging AI to assist in the selection of these returns. The IRS expects to open examinations of 75 of the largest partnerships in the United States that span across industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms, among others.

Greater Focus on Partnership Issues Through Compliance Letters. The IRS announced that it has identified discrepancies on balance sheets of partnerships with over US$10M in assets, which the agency states is an indicator of noncompliance. The IRS noted that many of these taxpayers fail to attach the required statements explaining these discrepancies. The IRS expects to start corresponding with 500 partnerships in early October and, depending on each partnership’s response, will consider an audit.

Priority Areas for Targeted Compliance Work in FY 2024

Expanded Work on Digital Assets. The IRS has indicated that it will continue expanding its compliance efforts involving digital assets through the use of John Doe summons and finalizing its proposed regulations regarding broker reporting. The IRS anticipates more digital asset cases will be developed for additional audit work in FY 2024.

More Scrutiny on FBAR Violations. The IRS has stated that its analysis of multi-year filing patterns indicates hundreds of possible FBAR non-filers with account balances averaging over US$1.4M. The IRS expects to audit the most egregious non-filer FBAR cases in FY 2024.

Labor Brokers. Interestingly, the IRS has noted a recent trend in which construction contractors make Form 1099-MISC/1099-NEC payments to an ostensible subcontractor, even though the subcontractor is a “shell” company with no legitimate business relationship with the contractor. The IRS explains that “[m]onies paid to shell companies are exchanged at a Money Service Business or by flow-through accounts in the name of the shell company and returned to the original contractor.”^[1] The IRS will focus its attention on this recent trend that has been observed in Texas and Florida, implementing civil audits and criminal investigations.

In addition to increased focus on high-income taxpayers and large partnerships, among others, and in addition to the priority areas targeted above, the IRS will also take steps to ensure audit fairness and protect taxpayers from scams and schemes.

We will continue to monitor these developments. For more information or to discuss further, please contact the authors or your Winston relationship attorney.

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^{[1] A “money services business” is defined as any “person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States, in one or more of” the following capacities: (1) a “dealer in foreign exchange”; (2) a “check casher”; (3) an “issuer or seller of traveler’s checks or money orders”; (4) a “provider of prepaid access”; (5) a “money transmitter”; (6) the “U.S. Postal Service”; and (7) a “seller of prepaid access.” 31 C.F.R. § 1010.100(ff)(1)-(7).}