I recently returned from the American Bar Association’s Taxation conference in Washington, D.C., which is…
The IRS has woken up.
Due to the coronavirus, the IRS paused all collection and enforcement activities until July 15, 2020. But recently we have started to receive some tax enforcement actions against some of our clients. The IRS has woken up and is getting back to work in earnest. As a result, client advisors need to be vigilant and aware of clients’ risks and vulnerabilities. In light of the foregoing, we have assembled the below list to keep advisors abreast of the latest IRS and tax developments:
1. High net-worth individuals: The IRS recently announced it will restart its global high-wealth program by commencing several hundred new examinations of high net-worth individuals between July 15, 2020 and September 30, 2020. Last month, IRS LB&I division Commissioner Douglas O’Donnell stated that the IRS exams will target taxpayers who have at least one connection with a pass-through entity, such as a partnership or S Corporation, or a private foundation. The IRS is coordinating information, including data analytics, from other divisions within the agency. Furthermore, the IRS is also ramping up efforts to examine private foundations. For this purpose, the IRS has identified more than 1,000 cases of private foundations associated with wealthy individuals. In particular, the IRS intends to go after foundations suspected of engaging in prohibited transactions such as “self-dealing.” This includes making loans to disqualified individuals.
IRS audits of individual tax returns showing more than $1 million of income have declined every year for the past 10 years. For the 2010 tax year, the IRS audited 8.77% of individual returns with income from $1 – $5 million, 14.82% of individual returns with $5 – $10 million, and 23.06% of individual returns with $10 million or more. For the 2018 tax year, the audit rate dropped to 0.05%, 0.04%, and 0.03%, respectively, even though the number of returns filed within each grouping has grown over the same time period. (Internal Revenue Service Data Book, 2019; Table 17a; https://www.irs.gov/pub/irs-pdf/p55b.pdf). The IRS has also embarked on a separate initiative to contact high-income individuals who have failed to file tax returns and plans to pursue criminal investigations in some of these cases (see below).
2. Upper-income non-filers: On May 29, 2020, the Treasury General for Tax Administration (TIGTA) issued a report that gave government officials reasons to pause. The TIGTA report estimated that intentional non-filing of tax returns by wealthy individuals had resulted in a staggering tax underpayment of $37 billion for 2011 through 2013.
Part of the problem is that high-income taxpayers are often independent contractors who don’t have taxes regularly withheld from paychecks like employees. Thus, it is easier for them to slip through the cracks, despite having a significant amount of taxable income.
About half of the non-filers owe more than $50,000 in tax while close to 2,000 taxpayers owe more than $1 million. In addition to the taxes, delinquent taxpayers will be subject to late payment and late filing penalties.
As a result, the IRS Commissioner reaffirmed a coordinated IRS initiative targeting “high-income taxpayers by increasing visits to those generally with incomes above $100,000 who failed to file tax returns in 2018 or previous years.”
3. Offshore Tax Evasion. The IRS Commissioner last month again verified that offshore tax reporting enforcement remains one of the IRS’s absolute top priorities. He assured a congressional committee that “the IRS will continue to pursue offshore tax noncompliance by all available methods.” There is no surprise here, as international tax compliance and enforcement has been atop the IRS’s list for years now. It will not be slowing down anytime soon.
4. Technology. As the IRS Commissioner briefed the Senate Finance Committee, he described a much more technologically savvy Internal Revenue Service: “the IRS must emphasize the use of technology to develop new enforcement tools.” Its “advanced data and analytic strategies allow [the IRS] to catch instances of tax evasion that would not have been possible just a few years ago.” We expect the IRS to (finally) leverage its databases with data analytics to identify tax non-compliance. It is expected the non-compliance to result in more letters to taxpayers.
Especially in light of anticipated tax revenue shortfalls, it is expected that the newly-awoken IRS will identify low-hanging fruit and commence enforcement activity against non-compliant taxpayers. If you represent clients with tax problems, do not wait for a letter to show up in the mailbox. Advisors should proactively identify issues and take defensive steps now.