By Tom Ozimek
Bolstered by a $60 billion cash infusion, the Internal Revenue Service (IRS) has ramped up its enforcement activities in order to boost tax revenues, with the tax agency focusing its compliance efforts on several categories of taxpayers.
In September, the IRS announced a “sea change” in every aspect of its operations—including a “sweeping, historic” tax enforcement crackdown to increase tax collections—thanks to the billions of dollars it received under the Inflation Reduction Act (IRA).
The big changes are driven in part by cutting-edge technologies, including artificial intelligence, which is meant to help IRS compliance teams better detect “tax cheats” and identify tax compliance loopholes to maximize the amount of money the agency collects from taxpayers.
According to IRS estimates, taxpayers in America pay around 85 percent of the total taxes they owe, with the difference between what is owed and what is paid known as the tax gap.
Between the years 2014 and 2016, the IRS estimated that the annual tax gap was around $496 billion.
The overall goal of the IRS’s enhanced tax enforcement activities is to narrow the tax gap, with certain groups of taxpayers facing the brunt of these efforts.
Prioritization of High-Income Cases
The IRS has said it would prioritize its enforcement actions on taxpayers with total positive income above $1 million and who have over $250,000 in recognized tax debt.
The agency has dedicated dozens of agents to this taxpayer category in fiscal year 2024, with the IRS saying it planned to contact roughly 1,600 such taxpayers who owe hundreds of millions of dollars in taxes.
IRS Commissioner Danny Werfel said in a recent interview with CNBC that, when the agency was “underfunded,” it lost the capacity to figure out what was going on with complex tax returns and so tax revenue from this group fell.
At the same time, because lower and middle-income taxpayers’ returns were simpler, their audit rates and tax intakes remained more or less constant during the years when the IRS experienced a funding crunch.
Now, thanks to the $60 billion funding boost, Mr. Werfel says the IRS is building capacity to take on higher-income filers in its compliance efforts, which he said restores balance to the tax system and makes it fairer.
Mr. Werfel, as well as Treasury Secretary Janet Yellen, have both said that audit rates wouldn’t rise above historic norms for Americans earning less than $400,000. While a watchdog has cast doubt on this pledge and Mr. Werfel has hinted that this might inadvertently happen, he insists this is the goal.
“I think 400,000 is a safe distance away from where most taxpayers are,” Mr. Werfel said in the Feb. 22 interview. “And they should know that when I get up in the morning and go to sleep at night, where my focus is from an enforcement standpoint, is in those high risk areas amongst the largest corporations, the largest complex partnerships, and millionaires and billionaires.”
In October, the IRS announced four new initiatives targeting high-income, high-wealth individuals, as well as large corporations.
One of these thrusts is focused on U.S. subsidiaries of foreign companies that distribute goods in the United States but don’t pay enough tax.
The second relates to the IRS Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) arm, which is being expanded and will be auditing an additional 60 big corporations with assets worth over $24 billion on average.
The third initiative involves cracking down on abuse of a corporate tax break that was repealed several years ago, while the fourth targets individual taxpayers who make over $1 million in annual income and have over $250,000 in recognized tax debts.
Non-Filers Earning Over $400,000
In its latest enforcement crackdown, announced on Feb. 29, the IRS said it had narrowed its focus on 125,000 cases of taxpayers with annual incomes over $400,000 who failed to file tax returns between 2017 and 2021.
The IRS said it was tipped off by various types of third-party information indicating that this group of taxpayers received taxable income but failed to file a tax return. Roughly 25,000 cases involve taxpayers who made over $1 million in income, while around 100,000 pertain to non-filers with incomes between $400,000 and $1 million. Information on these taxpayers indicates total financial activity of over $100 billion.
The IRS said it would soon start sending letters (known as CP59 notices) to the affected taxpayers at a rate of between 20,000–40,000 per week.
The agency warned that people who receive these letters should take immediate action to avoid higher penalties and “increasingly stronger enforcement measures.” The penalty for failure to pay is 5 percent of the amount owed each month, up to a maximum of 25 percent of the tax bill.
Private Jet Fliers
Another group getting special attention from the IRS are individuals who use corporate aircraft for both business and personal travel but don’t categorize the expenses properly and so may owe taxes.
The tax code allows business deductions for the expense of maintaining assets like corporate planes. However, corporate planes are often used for both business and personal travel, with personal use of business jets impacting eligibility for certain deductions.
Normally, personal use of a business jet should be included in the income of the individual traveling, with implications for the amount of taxes owed.
The IRS said on Feb. 21 that there hasn’t been enough scrutiny of this category of taxpayers, so the agency is dialing up its efforts in this area.
To help with the crackdown, the IRS said it will be using “advanced analytics” as well as some of the money it got from the recent $60 billion funding boost.
A watchdog report revealed that the IRS managed to rake in a record $4.9 trillion in taxes from Americans in the last fiscal year, in large part due to automated collections processes and aggressive audits.
While the IRS is set to continue increasing its reliance on automated systems to squeeze more tax dollars from American taxpayers, it’s also looking to hire another 3,700 tax enforcers as it spends an extra $46 billion of the recent $60 billion funding boost on enforcement.
