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IRS Announces Historic and Sweeping Shift In Focus Towards the Wealthy and Large Partnerships and Away From Working-Class Taxpayers With the Use Of Artificial Intelligence by MICHEL STEIN

The Internal Revenue Service (IRS) announced (IR-2023-166, September 8, 2023) a significant shift in its tax compliance efforts, aimed at addressing the fairness of the tax system by focusing more attention on high-income earners, partnerships, large corporations, and promoters who abuse tax laws. Statements by Commissioner Danny Werfel indicate that the IRS will be using funding from the Inflation Reduction Act and leveraging improved technology, including Artificial Intelligence, to better detect tax cheating, identify emerging compliance threats, and improve case selection tools to avoid burdening taxpayers with needless no change audits. The IRS plans to increase the audit rates for wealthy individuals, partnerships, and other high earners who have seen a significant decline in audit rates over the past decade. At the same time, the audit rates for those earning less than $400,000 per year will not increase.

Key elements of this major expansion in high-income/high wealth and partnership compliance work includes:

Largest Partnerships Leveraging Artificial Intelligence (AI). In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population. 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.

Greater Focus on Partnership Issues through Compliance Letters. The IRS has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance. Taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year. This effort will focus on high-risk large partnerships to quickly address the balance sheet discrepancy.  The IRS plans to notify around 500 partnerships though mailings in October.

Prioritization High Income Collection Cases. The IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.

The IRS also announced (IR-2023-176, September 20, 2023) a plan to establish special pass-through work unit organization to help with high-income compliance efforts, which will be housed in Large Business and International (LB&I). The IRS hopes that the new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe.  As part of a larger transformation, the IRS recently announced the opening of more than 3,700 position nationwide to help with expanded enforcement work focusing on complex partnerships, large corporations, and high-income and high-wealth individuals.

The IRS appears more ready and able than ever to address perceived non-compliance for the high-wealth individual and their related entities in efforts to close the tax gap and to make for a more equitable tax system. Taxpayers and their representations should stay informed.

UCLA Extension’s 39th Annual Tax Controversy Institute offers a platform to LB&I to showcase its latest efforts.

Interested in learning more about LB&I and its focus on high-wealth and large partnerships taxpayers, consider attending UCLA Extension’s Annual Tax Controversy Institute on October 26, 2023. Michel R. Stein will be moderating a panel during the morning session on The New Landscape in IRS Examinations – What Can We Expect in the New Tax Enforcement Environment for High Wealth Individuals and Large Partnerships, with amazing panelists:

Cliff Scherwinski – IRS Director Pass-Through Entities

Eric Cirelli – IRS Director of Field Operations, Global High Wealth

Hans Famularo – IRS Counsel (SB/SE) at Office of IRS Chief Counsel

Phil Wilson – Managing Partner, Costa Mesa Office at Marcum LLP

Michel R. Stein (Moderator)- Principal, Hochman Salkin Toscher & Perez 

UCLA Extension’s Annual Tax Controversy Conference is the preeminent conference exclusively dedicated to tax controversy and tax litigation. The conference provides an open forum for distinguished presenters and panelists to discuss, and often debate, sensitive tax practice issues with an engaged audience. For more information about the UCLA 39th Annual Tax Controversy Institute, click on this link.

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