IRS vows new enforcement efforts aided by AI

11/09/2023, 08:43

In what he described as "the start of sweeping, historic effort," IRS commissioner Danny Werfel announced a plan to focus more tax enforcement efforts on the wealthy and those who abuse the law. While some of the plans are familiar — such as auditing more millionaires — the specificity is new, particularly an announced focus on large partnerships.

Werfel's description of the future IRS is different than the reality of the recent past, with long wait times for taxpayers on the phone and a large backlog of paper returns.

In a call Thursday with reporters ahead of a news release (IR-2023-166) about the effort posted Friday, Werfel discussed using artificial intelligence (AI) to find patterns and trends among large partnerships and to identify possible nonfilers who hold millions in foreign bank accounts.

Werfel credited funds allocated to the IRS by the Inflation Reduction Act, P.L. 117-169, for the improvements.

"This new compliance push we are announcing today 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," Werfel said. "These are laws already on the books, passed by Congress, that the IRS hasn't had the funding for many years to actively enforce. We can't let that situation continue."

Whether the effort will live up to that description depends in large part on whether the IRS can hold onto the remaining funding. The $80 billion allocated to the IRS over 10 years through the Inflation Reduction Act was cut by about $20 billion as part of the debt ceiling deal reached in June. And some in Congress are eager to reduce those dollars — which are in addition to the IRS's annual budget — further.

Enforcement efforts

The two main efforts Werfel announced are the pursuit of 1,600 high-wealth taxpayers who owe at least $250,000 each and using AI to focus on large partnerships that the IRS previously did not have the resources to take on. Also, Werfel said, the IRS will improve the tax system for middle- and low-income people by ramping up efforts to take down schemes such as those that promise exorbitant earned income tax credit refunds.

"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," Werfel said. "I want people to know that the transformed IRS is on the side of hardworking, honest taxpayers."

A 2021 study from the National Bureau of Economic Research found that the top 1% of U.S. income earners do not report over 20% of their earnings to the IRS.

Earlier this year, the IRS said it was pursuing 175 millionaires who owed hundreds of millions of dollars in back taxes. So far, the Service has collected tens of millions of dollars from 40 of those millionaires, Werfel said.

Next up, the IRS will pursue another 1,600 millionaires who owe at least $250,000 each in unpaid taxes, he said. "If you pay your taxes on time, it should be particularly frustrating when you see high-wealth filers are not," he said. "We will make the system more fair."

Through the use of AI, which finds patterns and trends that were not visible previously, the IRS also will focus on large partnerships in two ways, Werfel said. First, it will audit 75 specific partnerships with over $10 billion in assets on average. And starting in October, the Service will mail a compliance alert to hundreds of partnerships with over $10 million in assets where the IRS discovered discrepancies between end-of-year balances compared to beginning balances in the following year.

Large partnerships "are some of the complex cases the IRS faces," he said. "And it involves a wide range of industries and activities where it's been far too easy for tax evaders to cut corners. The IRS has simply not had enough resources and staffing to address partnerships."

Other areas under new compliance scrutiny include:

Expanded work on digital assets. Following last month's release of proposed regulations for broker reporting (REG-122793-19), the IRS Virtual Currency Compliance Campaign, which began in 2018, will continue. A review showed the potential for a 75% noncompliance rate among taxpayers identified through record production from digital currency exchanges.
More scrutiny of FBAR violations. A U.S. person with a financial interest in a foreign financial account is required to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of all foreign financial accounts is over $10,000 at any time. An IRS analysis of multiyear filing patterns identified hundreds of possible FBAR nonfilers with account balances that average over $1.4 million. The IRS plans to audit what it considers to be "the most egregious potential non-filer FBAR cases" in fiscal year 2024.
Labor brokers. The IRS says it has seen instances where construction contractors are making Form 1099 payments to an apparent subcontractor that is really a shell company with no legitimate business relationship with the contractor. This money then flows back to the original contractor. The IRS plans to conduct both civil audits and criminal investigations.

Scammers and fraudsters frequently target taxpayers with more modest incomes by promising inflated earned income tax credit refunds or tricking people into tax-related identity theft, Werfel said. The IRS will continue its work to ensure audit fairness; protect taxpayers from scams and schemes; and protect against identity theft, he said.

Cuts to the IRS budget during the 10 years preceding the Inflation Reduction Act "enabled wealthy individuals, large partnerships, complex and large corporations to come up with increasingly creative ways of reaching their most tax-advantaged status," Werfel said. "The issue is that in many of those cases they took steps that are technically tax evasion under the tax law, and that's where this focus is. We now have the ability to invest in analytic capacity, people capacity and technology capacity to catch up from 10 years of under-investment and to establish a new expectation across our wealthy filers that we have the ability now to see where income is being shielded where it should not be shielded."

Source: www.journalofaccountancy.com

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