A key component in promoting the highest degree of voluntary compliance on the part of taxpayers is enforcement of the tax law. By pursuing those individuals and businesses who don’t comply with their tax obligations, the IRS is being fair to those who are compliant. This helps promote public confidence in our tax system for all taxpayers.
The IRS enforces the tax law in several ways, but primarily through the examination of tax returns that are identified as having the highest potential for noncompliance. This identification is determined using risk-based scoring mechanisms, data driven algorithms, third party information, whistleblowers and information provided by the taxpayer. The objective of an examination is to determine if income, expenses, and credits are being reported accurately.
IRS employees conduct examinations or audits in one of two ways. The first is by mail and are called correspondence examinations. The second, called face-to-face examinations, take place in person at an IRS office or at the taxpayer’s place of business. The complexity of the return determines whether the audit is by correspondence or in person. Certain individual non-business returns with low- and medium-adjusted gross income can be handled effectively by correspondence audit. All other returns selected for examination are better handled either as an in-IRS office examination or at the taxpayer’s place of business.
The IRS recently announced they were capitalizing on the additional funding provided by the Inflation Reduction Act by giving more attention to wealthy individuals, partnerships and high-income earners, all categories of taxpayers that have seen sharp drops in audit rates during the past decade. The changes will be driven with the help of improved technology as well as Artificial Intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats, and improve case selection tools to avoid burdening taxpayers with needless “no-change” audits.
As part of the effort, the IRS will also ensure audit rates do not increase for those earning less than $400,000 a year as well as adding new fairness safeguards for those claiming the Earned Income Tax Credit. The EITC was designed to help workers with modest incomes. Audit rates of those receiving the EITC have been at high levels in recent years, while rates dropped precipitously for those with higher income, partnerships, and returns with more complex tax situations. The IRS will also be working to ensure unscrupulous tax preparers do not exploit people claiming these important tax credits.
The IRS will be prioritizing scrutiny of 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 fiscal year (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.
The IRS will place greater emphasis on partnerships with over $10 million in assets that have discrepancies on their balance sheets, which is an indicator of potential non-compliance.
In addition to the foregoing, more of the IRS’s attention will be focused on high-income taxpayers that continue to utilize Foreign Bank accounts to avoid disclosure and related taxes and fail to comply with the requirements to file a Report of Foreign Bank and Financial Accounts (FBAR). This form must be filed for any year that the aggregate value of all the U.S. person’s 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 FY 2024.
Another priority will involve digital currency. Initial IRS investigations showed the potential for a 75% non-compliance rate. The IRS projects more digital asset cases will be developed for further compliance work early in FY 2024.
There are also growing concerns that a substantial share of new claims from the pandemic-era relief program, the Employee Retention Credit (ERC), which is being widely touted by promoters, are ineligible and increasingly putting businesses at financial risk by being pressured and scammed by aggressive promoters and marketing. So much so that IRS Commissioner Danny Werfel on September 14, 2023, ordered an immediate moratorium through at least the end of 2023 on processing new ERC claims. The IRS also announced it was increasingly shifting its focus to review these claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. Hundreds of criminal cases are being worked, and thousands of ERC claims have been referred for audit.
Contact this office immediately should you receive an audit notice. Without a substantial knowledge of tax law and audit procedures you should think twice about handling an audit on your own.