The IRS announced that it is beginning a major shift in its enforcement efforts by concentrating more of its audit focus on wealthy individuals, large corporations and partnerships, and promoters abusing the tax system by hiring 3,700 mid-level revenue agents and other compliance employees with accounting, legal, and financial backgrounds to support its efforts. The IRS also announced that it is creating a new unit dedicated to auditing large and complex partnerships and other pass-through entities, such as S corporations. The announcement includes the following statement from Commissioner Danny Werfel:
“We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns. This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come.”
This shift of focus to high-income taxpayers and large corporations and partnerships is possible because of the billions of dollars of multiyear funding the IRS received under the IRA.
Crowe observation
Under an agreement between the White House and Congress this summer, IRA funding for the IRS will be reduced from $80 billion to $60 billion. It is unclear whether IRS funding will be reduced further as policymakers in Washington work through the fiscal year 2024 budget process.
Highlights of the new IRS focus
- Prioritization of high-income cases. The IRS will increase focus on the high wealth, high balance due taxpayer field initiative. This effort targets taxpayers with income of more than $1 million and tax debt greater than $250,000. The IRS previously collected $38 million from 175 taxpayers in this group and plans to expand its efforts by contacting approximately 1,600 additional taxpayers in this category.
- Creation of a new partnership and pass-through entity compliance group. Early next year, the Large Business and International (LB&I) Division will have a new group to focus on partnerships and other pass-through entities, such as S corporations. The new group will include audit resources from both the LB&I Division and the Small Business/Self-Employed (SB/SE) Division, as well as many of the 3,700 new hires. Generally, partnerships and S corporations with assets of $10 million or more and partnerships and S corporations that are audited as part of an audit of an individual under the global high net worth program are audited by the LB&I Division, while partnerships and S corporations that do not fit that criteria are audited by the SB/SE Division.
Crowe observation
A new centralized partnership and pass-through entity group will mean more consistency in training and more consistent procedures regardless of whether the entity is being audited by the LB&I Division or the SB/SE Division.
- Expansion of the Large Partnership Compliance (LPC) program. The IRS is using new artificial intelligence capabilities to expand its LPC program, which audits some of the largest and most complex partnerships, to include selection of additional large partnerships and compliance risks. The IRS stated that it would open 75 LPC examinations of a cross section of large partnerships, including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms, by the end of September.
- Greater focus on partnerships through compliance letters. The IRS will increase its focus on partnerships with assets of more than $10 million that show balance sheet discrepancies between year-end and beginning balances the following year. The IRS stated that in October it would mail letters to approximately 500 partnerships to request information to explain the discrepancies and will refer some for audit depending on the response received.
- Additional priority areas for compliance efforts in 2024. The IRS has identified additional priority areas that will focus on wealthy individuals, including expanded efforts related to digital assets, reports of foreign bank and financial accounts (FBAR), and transactions involving labor brokers and Form 1099-MISC, “Miscellaneous Income,” reporting.
Looking ahead
The IRS’ focus on auditing wealthy individuals and large businesses, coupled with additional funding from the IRA, likely will mean that high-income individuals and large corporations and partnerships will have a greater chance of being selected for audit in the next few years. Taxpayers should consult their tax advisers to understand how to be prepared in case they are selected for audit, especially in light of the complex centralized partnership audit rules under the Bipartisan Budget Act of 2015. Specifically, taxpayers selected for audit should be prepared for IRS information document requests relating to their organizational structure, governance documents and operating agreements, compliance records, and documentation supporting positions on their returns.
