September 12, 2023
IRS enforcement efforts will focus on large partnerships, high-income earners
The IRS announced that it will focus its attention on "high-income earners, partnerships, large corporations and promoters abusing the nation's tax laws" and gave specific numbers on how many taxpayers it plans to contact. The IRS said more details will be announced in the weeks and months ahead.
After receiving funding under the Inflation Reduction Act, the IRS said it is using those resources to improve its technology and use of artificial intelligence to identify compliance problems and improve case selection.
As part of the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with over $1m in income that have more than $250,000 of tax debt. The IRS said it will have "dozens" of Revenue Officers focusing on these collection cases in FY 2024. The agency will be contacting about 1,600 taxpayers in this category.
The IRS is expanding the Large Partnership Compliance (LPC) program to additional large partnerships. The agency will use artificial intelligence to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax. The IRS plans to open examinations of 75 of the largest US partnerships by the end of September. These partnerships each have more than $10b in assets and include alternative asset management, real estate investment partnerships, publicly traded partnerships, large law firms and other operating partnership in various industries.
The IRS also plans to address balance sheet discrepancies in partnerships that have over $10m in assets and show discrepancies between end-of-year balances and beginning balances of the following year. Beginning in early October, the IRS will start mailing around 500 partnerships and add them to the audit stream, depending on the partnership's response.
Additional priority areas
Digital assets: The IRS will continue with its efforts involving digital assets, stating that the Virtual Currency Compliance Campaign "showed the potential for a 75% non-compliance rate among taxpayers identified through record production from digital currency exchanges." The IRS plans to develop more digital assets cases early in FY2024.
FBAR violations: The IRS plans to audit in FY 2024 the "most egregious" potential non-filer FBAR cases of taxpayers with foreign bank accounts. The agency's analysis identified hundreds of possible FBAR non-filers with accounts averaging over $1.4m.
Labor brokers: The IRS will use civil audits and criminal investigations to address construction contractors that are making Form 1099-MISC/1099-NEC payments to an apparent subcontractor, which turns out to be a shell company that allows the money to flow through to the original contractor.
The IRS's enhanced compliance initiative is consistent with the intent behind the IRA funds and agency statements about its focus. The use of improved technology and artificial intelligence should help IRS to better detect compliance risk, identify emerging areas of noncompliance, and select and deselect cases for audit. The initiative could have significant implications for operating partnerships across various sectors and among private equity and alternative asset management funds, including hedge funds, credit funds, real estate funds, infrastructure funds and energy funds. The details of whom the IRS intends to pursue puts taxpayers in those groups on notice, allowing them to prepare for any contact in the near-term.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor