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The Internal Revenue Service (IRS) building stands on April 15, 2019 in Washington, DC. April 15 is … [+]
Last month, IRS Commissioner Danny Werfel announced a series of taxpayer initiatives described as a “top to bottom review of enforcement work” at the IRS, thanks to increased dollars from the Inflation Reduction Act. The Act significantly boosted funding for the IRS, guaranteeing tens of millions of dollars over its operating budget for improvements and enforcement. Those initiatives include a sharper focus on high-income earners, partnerships, large corporations, and promoters abusing the nation’s tax laws.
Now, in what was characterized as a second quarterly update, Werfel has announced new initiatives to pursue high-income, high-wealth individuals who do not pay overdue tax bills and large corporations. These initiatives are intended to close the tax gap—the difference between what is owed and what is being paid. The IRS estimates the tax gap to be $688 billion.
High-Income Taxpayers
The IRS has been ramping up efforts to pursue high-income, high-wealth individuals who have not filed their taxes or failed to pay recognized tax debt. These efforts are focused on millionaires—those taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. As announced in September, the IRS has identified about 1,600 new taxpayers who owe hundreds of millions of dollars in taxes—to date, the IRS has collected $122 million in 100 of these cases.
Werfel cited some specific examples of enforcement activities, including an individual who was sentenced to over a year in prison and ordered to pay more than $15 million in restitution. Joseph Nocito, age 81, of Sewickley, Pennsylvania, was accused of illegally classifying millions of dollars of personal expenses as deductible business expenses. Those dollars were used to pay his butler, cook, and landscaper, as well as finance luxury vehicles, including a 2008 Rolls Royce Phantom, Jaguar, and Maserati. Other expenses included artwork, country club memberships, homes for his children, and private school tuition for grandchildren.
Werfel also pointed to the case of Stephen G. Genakos, 62, the owner and managing director of Sportsmans Grille. Genakos was accused of filing false returns and skimming over $670,000 from the Sportsmans Grille. This month, he pleaded guilty to tax fraud and faces up to three years in prison.
Large Corporations
The IRS is also ramping up compliance efforts targeted to U.S. subsidiaries of foreign companies. Specifically, the IRS is focused on transfer pricing—that’s the price that a company charges for goods and services exchanged between subsidiaries or affiliates of a corporation. Those prices are supposed to be at arm’s length, or what a willing buyer would pay a willing seller. But the IRS says that some foreign companies report losses or low margins through improper transfer pricing strategies in order to avoid reporting the correct amount of U.S. profits. To stop this practice, the IRS is sending compliance alerts to approximately 150 subsidiaries of large foreign corporations to reiterate their U.S. tax obligations and “incentivize” self-correction. Those notices will be mailed out beginning next month.
And remember those new workers that the IRS is hiring? The Large Corporate Compliance (LCC) program targets the largest and most complex corporate taxpayers with average assets of more than $24 billion and average taxable income of approximately $526 million annually. With the new hires, the IRS will be starting an additional 60 audits of the largest corporate taxpayers selected using a combination of artificial intelligence and subject matter expertise in areas such as cross-border issues and corporate planning and transactions. Those audits will begin in 2024.
Finally, the IRS is cracking down on section 199 abuse. Prior to its repeal under the Tax Cuts and Jobs Act, section 199 allowed a deduction for domestic production activities in the U.S. But after the repeal, the IRS received hundreds of claims collectively seeking more than $6 billion in refunds, with a significant portion of filers claiming the deduction for the first time. To combat this issue, in 2018, the IRS launched a campaign to address noncompliance and review high-risk claims in this area. The IRS says these efforts have been successful, and were recently bolstered by a significant win in the Tenth Circuit Court of Appeals. According to Werfel, this will have far-reaching benefits to the IRS’ ongoing efforts to ensure compliance.
Improving Taxpayer Service
The IRS is not only focused on enforcement. Werfel says that the IRS is also working on improving taxpayer service. For in-person service, the IRS is building on earlier efforts to expand Taxpayer Assistance Centers (TACs). The IRS has opened or reopened 50 TACs since the passage of the IRA, including six centers in the last two months. As of Sept. 23, 2023, the IRS has hired 745 employees to staff these TACs. This represents a 31% net increase in staffing compared to the last fiscal year.
Technology
Werfel says taxpayers deserve the same functionality in their online accounts that they experience with their other financial institutions. For example, taxpayers are now able to respond to notices online. Until the most recent tax season, when taxpayers received notices, they had to respond through the mail. Now, taxpayers can respond to ten of the most common notices for credits online. As of Sept. 29, 2023, the IRS has received more than 32,000 responses to notices via the online tool.
More changes are coming. The IRS is enabling taxpayers to submit mobile-friendly forms with the launch of the first three forms (Form 15109, Request for Tax Deferment, Form 14039, Identity Theft Affidavit, and Form 14242, Reporting Abusive Tax Promotions and/or Preparers)—a fourth form, Form 13909, Tax-Exempt Organization Complaint, will launch later this fall, and at least 20 more of the most-used tax forms will launch in early 2024. These forms are adapted for mobile and can be submitted electronically. Why mobile? The IRS reports that an estimated 15% of Americans rely solely on mobile phones for their Internet access—they do not have broadband at home—so making forms available in mobile-friendly formats is essential.
In addition, the IRS continues to expand the functionality of several online platforms. Earlier, the IRS launched individual accounts and tax professional accounts. Now, the IRS has launched the first phase of the Business Tax Account. This initial phase allows unincorporated sole proprietors who have an active Employer Identification Number (EIN) to set up a business tax account, whether they can view their business profile and manage authorized users. Future improvements will allow taxpayers to use their business tax accounts to view letters or notices, request tax transcripts, add third parties for power of attorney or tax information authorizations, schedule or cancel tax payments, and store bank account information.
Finally, the IRS continues to scan paper returns. As of this month, the IRS had scanned over one million forms during the 2023 calendar year—more than 480,000 Forms 940, 579,000 Forms 941, and more than 90,000 Forms 1040. Customer service employees do not currently have easy access to the information from paper returns and other correspondence submitted by mail. Once paper returns are digitized, extracting the data will allow IRS customer service employees to answer taxpayer questions and resolve issues more quickly and accurately.
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