The IRS announced that it will significantly increase its enforcement efforts in tax compliance by turning more attention to high-income earners, large corporations and large partnerships such as hedge funds, real estate firms, and law firms.

With regard to high-income earners, the IRS "will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt," the agency announced.

The IRS will also expand its Large Partnership Compliance (LPC) program, launched in 2021. "By the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries," the agency announced "On average, these partnerships each have more than $10 billion in assets."

Using some of the $60 billion allocated to it under the Inflation Reduction Act (which was recently reduced from its initial $80 billion) for these efforts, the IRS will use improved technology, as well as artificial intelligence (AI), to identify partnerships and other high earners whose audit rates have dropped in the past decade.

“These are complex cases for IRS teams to unpack,” IRS Commissioner Daniel Werfel said in a press briefing reported by The New York Times and The Wall Street Journal.  "The IRS has simply not had enough resources or staffing to address partnerships; in a real sense, we’ve been overwhelmed in this area for years. … These new tools are helping us see patterns and trends that we couldn’t see before.”  

In October, the IRS will send about 500 compliance alerts to other large partnerships that the agency has found to have discrepancies in their balance sheets. These partnerships could also face audits if they cannot explain those discrepancies.

In addition to a major expansion in targeting high-income/high wealth and partnerships, the IRS will also focus its compliance work on digital assets, Report of Foreign Bank and Financial Accounts (FBAR) violations, and labor brokers for in fiscal year 2024. With regard to labor brokers, the IRS explained that it "has seen instances where construction contractors are making Form 1099-MISC/1099-NEC payments to an apparent subcontractor, but the subcontractor is a 'shell' company that has no legitimate business relationship with the contractor. Monies paid to shell companies are exchanged at Money Service Businesses or flowed through accounts in the name of the shell company and returned to the original contractor."

The IRS will also focus on improved equity in audits, warning about emerging scam issues and protection against identity theft. The agency will help working taxpayers by improving compliance selections, and it will protect taxpayers and businesses from aggressive scams and schemes, by means of making improvements in audits involving Earned Income Tax Credits (EITC) and warning consumers about emerging scams and schemes. With regard to identity theft, it will continue the work of the Security Summit initiative, "a joint effort between the federal government, state tax agencies and the nation's software and tax professional communities." A major component of this initiative has been raising awareness about identity theft schemes.

To gain insights into how generative AI is transforming tax research, attend the Foundation for Accounting Education's Rise of Generative AI for Tax Research Tech Session on Oct. 5.