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The IRS is Hiring: Expect New Enforcement

I recently returned from the American Bar Association’s Taxation conference in Washington, D.C., which is the largest gathering of tax lawyers in the country. At the conference, I attended a speech given by the new IRS Commissioner Chuck Rettig where he mentioned a few intriguing areas of concern.

Despite budget cuts, Commissioner Rettig stated that the IRS is rapidly increasing the number of agents in certain divisions, including the IRS’ Small Business/Self-Employed Modernization and Information Technology Divisions. He said that the IRS has a “best-in-class data warehouse” and intended to use “data analytics” to increase its enforcement capabilities.

It is important to note that the Commissioner is a former practicing tax attorney who (like me) actively and aggressively defended (and cleaned up) taxpayers in complex tax controversy matters, including US international tax compliance. Interestingly, he also mentioned that he will not allow the illegal tax shelter scandals to happen during his tenure.

The new IRS hiring spree means that there may be more audits and investigations of noncompliant taxpayers, including those who own foreign assets and receive foreign income. The fact that the Commissioner specifically mentioned illegal tax shelters and international tax compliance may indicate that taxpayers with offshore assets may soon be at an even higher risk of the IRS discovery of their tax noncompliance.

Furthermore, with more agents available, the IRS will be able to expand the scope of its international tax audits. We can anticipate that there will be more audits with respect to Forms 5471 (owners of a foreign corporation), 3520/3520A (owners and beneficiaries of foreign trusts), 8621 (PFICs, including foreign mutual funds) and 8865 (owners of a foreign partnership).

With new data analytics personnel, the IRS will also be able to better utilize the voluminous data it receives from foreign financial institutions under the Foreign Account Tax Compliance Act (“FATCA”). A basic comparison of FATCA data and taxpayers’ filing data could yield many thousands of instances of noncompliance.  In other words, the IRS will be able to easily and efficiently identify more noncompliant taxpayers.

In light of the new Commissioner’s recent comments, all client advisors should be aware of the IRS’ new data analytics priorities especially concerning clients with possible tax risks and vulnerabilities.