The Internal Revenue Service (IRS) has announced a new tax enforcement initiative that will target high-income earners, partnerships, and individuals with foreign bank accounts. The aim of this effort is to restore fairness to the tax system by focusing on wealthy taxpayers who have seen a decline in audit rates over the past decade.
The IRS will specifically target individuals who report over $1 million in income and have more than $250,000 in recognized tax debt. The agency has identified 1,600 taxpayers fitting these criteria who collectively owe hundreds of millions in unpaid taxes. Starting in fiscal year 2024, specialized revenue officers will be dedicated to collecting from these high-end delinquent accounts, with visits expected as early as next year.
This crackdown follows the injection of additional funding into the IRS budget from the Inflation Reduction Act. The agency plans to use this funding to collect more from wealthy tax cheats while maintaining low audit rates for individuals earning less than $400,000 per year. The goal is also to reduce or limit audits of moderate- and low-income taxpayers claiming the Earned Income Tax Credit (EITC).
The IRS will also expand its examinations of large partnership tax returns, as these returns have historically received limited scrutiny due to their complexity. Audit rates for these large partnerships have declined in recent years as the agency’s resources and staff have decreased. By the end of September, the IRS plans to open audits for 75 of the largest partnerships in the U.S., each with over $10 billion in assets. In October, compliance notices will be sent to 500 partnerships for unexplained discrepancies in their balance sheets.
To analyze these complex returns, the IRS will utilize artificial intelligence (AI) technology. The agency aims to use machine learning to detect anomalies and target non-compliant returns more accurately, allowing for more efficient use of limited IRS exam resources.
The IRS emphasizes that this new initiative will not affect taxpayers with moderate and lower incomes. However, individuals with partnership interests, particularly in large private equity funds, hedge funds, or real estate partnerships, may be impacted by the increased enforcement.
In addition to targeting high-income earners and partnerships, the IRS is also expanding its enforcement efforts on failure to disclose foreign bank and financial accounts. Taxpayers must file a separate foreign bank account report (FBAR) if they have over $10,000 in offshore accounts. The IRS has found filing discrepancies among hundreds of taxpayers with average account balances exceeding $1.4 million. The most serious FBAR offenders will be audited in 2024.
It is crucial for individuals with foreign accounts or assets to pay close attention to their FBAR filing obligations, as the IRS plans to utilize sophisticated means to identify unreported foreign holdings. Penalties for willful failures to disclose required information can be significant.
In conclusion, the IRS is intensifying its enforcement efforts on high-income taxpayers, large partnerships, and individuals with foreign financial accounts. Even individuals who have previously avoided audits may now come under scrutiny as the IRS receives increased funding. Seeking qualified tax advice, being proactive about compliance, and promptly responding to any IRS notices are advisable steps to minimize potential penalties and interest.
Tax planning tips include consulting a financial advisor with tax expertise who can guide individuals in their financial journey. SmartAsset offers a free tool to match individuals with up to three vetted financial advisors who serve their area. Additionally, selecting the right tax software for DIY tax filers is essential, and SmartAsset has compiled a list of the best software options for different types of filers.
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