The IRS recently announced that it was overly focused on working-class taxpayers (which are easier to audit) and that a “sweeping, historic effort to restore fairness in tax compliance” will utilize Inflation Reduction Act funding to shift attention to high-income earners, partnerships, large corporations, and promoters. Audit rates for high-income earners dropped dramatically in recent years and the IRS intends to use Artificial Intelligence and other new technologies to “detect tax cheating, identify emerging compliance threats, and improve case selection.”
High-net-worth individuals and companies have enjoyed the lack of scrutiny in recent years and should be on alert for changes to come – audit letters, civil and criminal investigations, and enforced compliance. The audits will be conducted by the Large Business and International (LB&I) audit group which has jurisdiction over corporations and partnerships with assets over 10 million and international and offshore businesses and individuals. The Revenue Agents in the LB&I group are among the most experienced and highly trained in the IRS and they often work in teams.
High-Income Collections – Beginning FY 2024, the IRS will be employing dozens of additional Revenue Agents to collect taxes owed by high-net-worth individuals. The IRS had earlier success with a similar program, and they intend to expand it to contact an additional 1,600 high-income taxpayers who together owe hundreds of millions of dollars.
Large Partnership Audits – In 2021, the IRS launched the Large Partnership Compliance (LPC) program focusing on the largest most complex partnership returns in the filing population. The program is now being expanded through the use of AI’s “groundbreaking collaboration” and “cutting-edge machine technology” to focus on large partnerships – historically subject to limited audit coverage.
The IRS started the LPC expansion by opening audits on 75 of the largest partnerships, which include hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries. These audits will be very complex since they involve large businesses comprised of multiple partnerships flowing into each other and, importantly, then flowing onto individual partner returns. Partnership tax (LLCs and Partnerships), known as “flow-through” companies, have their taxable income flow through and is reported, via Form k-1, on the partners’ personal tax returns.
If the partnership is under audit, the partners are also under audit. IRS rules require that when auditing a company taxed as a partnership, the Revenue Agent must look at the partner’s personal returns to confirm the partnership income is reported and determine if there are any “LUQs” – Large, Unusual, or Questionable items. LUQs include other companies, investments, offshore interests, tax shelters, large dollar amounts, etc. Once found, the IRS can then decide whether it should conduct a full audit of the individual taxpayer or just focus on the LUQ.
Compliance Letters – The IRS identified that many large partnerships, with over $10 million in assets, have discrepancies on their balance sheets. The discrepancies between beginning and ending balances are in the millions and do not include the disclosures that companies are required to make. The IRS is starting with 500 compliance letters and based on the response, will add the partnerships to the audit stream for additional work.
Priority Target Areas – IRS compliance efforts will target micro-captive insurance arrangements, syndicated conservation easements, digital assets, foreign bank accounts, and labor brokers among other areas of detected abuse.
Virtual currencies remain a top priority for the IRS which reports the potential for a 75% non-compliance rate. The IRS determined the rate through analysis of records produced by digital currency exchanges after they received IRS “John Doe” Summons for the information. The IRS states that additional audits will be generated from the information.
Like crypto, Reports of Foreign Bank and Financial Accounts, known as an FBAR, through FinCEN Form 114 continue to be an area of IRS scrutiny. High-income taxpayers continue to utilize offshore accounts without making the necessary tax disclosures. Under the Bank Secrecy Act, a U.S. person with a financial interest over a foreign financial account is required to file Form 114 (FBAR) if the aggregate value of all their foreign financial accounts is more than $10,000 at any one time. The form is filed online with the Financial Crimes Enforcement Network (FinCEN).
Large company, high net-worth, partnership, and priority targeted audits are serious matters that require the guidance of Greenspoon Marder’s experienced tax professionals with substantial audit and IRS experience. IRS Revenue Agents are trained to find the areas of non-compliance and often begin the audit with extensive knowledge of the taxpayer under examination and predetermined questions designed to prove taxpayer non-compliance. It is essential that taxpayers who receive audit letters seek the advice of tax counsel and understand their rights before the audit begins.
If you received an audit letter, we can help. Call us today.