The IRS’s New Strategies in Enforcement

As of the beginning of 2024, the IRS had identified over 1,600 millionaires and billionaires who owed back taxes. In the words of Commissioner Danny Werfel, the Service is now putting in “a laser-focused effort to collect that money.”

We’ve previously written about the new funding allocated to the IRS by the Inflation Reduction Act of 2022. IRS has made no secret of its intention to use a large portion of its $60 billion raise over the next ten years to “closing the tax gap,” the nearly $400 billion in tax that is due but not collected each year. Approximately 60% of the new funds are earmarked for enforcement.

Last week, we discussed the targets: wealthy individuals, partnerships, and corporations that have failed to pay some or all of what they owe.

More Audits of Wealthy Taxpayers

The tax returns and financial situations of the complex partnerships, large corporations, and wealthy individuals targeted by the IRS are extremely complex. Underfunded and understaffed for years, the IRS has simply not been able to dedicate the necessary time to ensuring that these entities pay the taxes they owe. Thanks to this lack of resources, the number of audits overall has fallen over the past decade, particularly for the wealthy with the result that taxpayers with incomes of over $5 million had only a 2.35% chance of being audited in 2019.

That’s about to change.

Promising that audit rates will not increase for those earning less than $400,000 a year, the IRS has vowed to raise the number of audits on wealthy taxpayers, including both individuals and businesses. In particular, the Service will intensify its efforts with taxpayers who have total positive incomes above $1 million and more than $250,000 in recognized tax debt. To date, it has contacted close to 1,600 taxpayers who collectively owe hundreds of millions of dollars in taxes.

New Hires

It’s no surprise, therefore that much of the new budget is going toward staff. In August, the IRS workforce was close to 90,000 full-time employees, more than it had seen in over a decade. In September, the IRS announced that it will hire 3,700 new employees to help expand tax enforcement focusing on complex partnerships, large corporations, and wealthy individuals that have failed to pay taxes. Hiring efforts are underway: in November and December, it offered positions to 560 new skilled accountants.

The IRS has also expressed interest in hiring 350 new accountants for its Global High Wealth Program, part of the Service’s Large Business and International Division. This would more than double the existing number of staff to 500.

The IRS is not only hiring record numbers of new accountants, it is greatly expediting the hiring process. What used to take several months may now take as little as two days.

Better Technology

All those new hires will get the benefit of some shiny new technology as well. Last December, the IRS introduced Chief Information Officer and Chief Operating Officer positions to better align information technology with its business units.

By the end of 2023, the IRS had purchased 132 high-speed scanners. That may not sound particularly exciting, but as recently as 2022, the information on every paper return had to be manually entered into the IRS systems. The scanners are part of the Service’s ambition to digitize all returns and achieve paperless processing for all tax returns by filing season 2025 — a goal that will eliminate up to 200 million pieces of paper every year, cut processing times in half, and expedite refunds by several weeks. Going paperless will support enforcement goals by creating a faster, more accurate, and more efficient system — as a bonus, it may save the IRS as much as $40 million a year in storage fees.

The IRS is also putting artificial intelligence, cutting-edge machine learning, data analytics, and predictive modeling to work. It will use these technologies to detect tax fraud, help staff identify the areas of greatest abuse, identify potential compliance risks in previously under-examined taxpayer segments, and improve visibility into how and where wealthy taxpayers are shielding their income. One example is the Large Partnership Compliance Program, which will use AI to scrutinize 75 partnerships with over $10 billion in assets.

Tonneson Can Help

With the IRS ramping up its enforcement efforts and technology capabilities, it’s clear that wealthy taxpayers and large corporations will be under increased scrutiny. Now more than ever, it’s crucial to ensure your tax affairs are in order. Whether you’re an individual with high net worth or a large enterprise, Tonneson + Co offers comprehensive accounting services and proactive tax planning strategies to ensure compliance and optimize your financial position. With our expertise and guidance, you can face the IRS’s new enforcement strategies with confidence. Contact us today to ensure that your taxes are handled correctly and efficiently.