September 15, 2023 - IRS Seeks to Restore Fairness to Tax System

Matthew Cuplin |

The IRS announced that it will use the additional funding it received through the Inflation Reduction Act of 2022 (IRA) to restore fairness in compliance by shifting its attention to high-income earners, large partnerships, large corporations and promoters of tax schemes who abuse U.S. tax law. The effort will utilize improved technology and AI to better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid the needless “no-change” audits that burden taxpayers.

As part of its efforts toward tax fairness, the IRS said it would not increase audit rates for taxpayers earning less than $400,000 a year and would add new fairness safeguards for those claiming the earned income tax credit (EITC). The EITC was intended to help taxpayers with modest incomes, but audit rates for those claiming the credit have remained high in recent years, while the rates dropped precipitously for high-income partnerships and taxpayers with complex tax situations. The agency will also work to help protect those claiming the EITC from being exploited by unscrupulous tax preparers.

The expansion of compliance efforts for individuals and partnerships with high income and wealth will include:

Prioritization of high-income cases

The IRS's High Wealth, High Balance Due Taxpayer Field Initiative will intensify its enforcement efforts for taxpayers with incomes of more than $1 million who have more than $250,000 in recognized tax debt. The IRS plans on contacting roughly 1,600 taxpayers who fall into this category and owe hundreds of millions in taxes. The initiative has already collected $38 million from more than 175 high-income earners, and the IRS plans to have dozens of revenue officers focusing on high-end cases in fiscal year 2024.

Utilize AI in large partnership compliance program

The IRS will be expanding the Large Partnership Compliance (LPC) program it launched in 2021 to examine additional partnerships selected with the help of AI. By the end of September, the IRS will be opening examinations of 75 of the country's largest partnerships across a cross-section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, law firms and other industries. On average, each of these partnerships has more than $10 billion in assets.

Increased focus on partnership discrepancies

Partnership returns showing discrepancies of millions of dollars between end-of-year balances and beginning balances for the following year are often an indicator of potential non-compliance. Those discrepancies have been increasing in recent years, with many taxpayers not attaching the required statements explaining them. Beginning in early October, the IRS will start mailing compliance letters to about 500 of these partnerships. The agency will use the responses it receives to decide whether the partnerships should be added to the audit stream