The Tax Times: IRS Ramps Up New Initiatives to Ensure Partnerships, Large Corporations Pay Taxes Owed and Continues to Close Millionaire Tax Debt

The IRS has collected over half a billion dollars from millionaires in its attempts to capture amounts owed by complex partnerships, large corporations, and wealthy individuals using enforcement funds authorized by the Inflation Reduction Act (PL 117-169).

"If you are wealthy, there will be increased scrutiny if there are tax issues, and we remain committed to following the Treasury Department's directive not to increase audit rates relative to historical levels for small businesses and households earning $400,000 per year or less," IRS Commissioner Danny Werfel told reporters January 11.

The IRS is continuing to pursue millionaires that have not paid hundreds of millions of dollars in tax debt, with an additional $360 million collected on top of the $122 million reported in late October. The IRS has now collected $482 million in ongoing effort to recoup taxes owed by 1,600 millionaires with work continuing in this area.

The IRS is working to ensure large corporate, large partnership and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying taxes owed. The IRS is now taking swift and aggressive action to close this gap.

Prioritization of high-income cases: The IRS has ramped up efforts to pursue high income, high wealth individuals who have either not filed their taxes or failed to pay recognized tax debt, with dozens of Revenue Officers focused on these high-end collection cases. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt. In an initial success, the IRS collected $38 million from more than 175 high-income earners. The IRS last fall began contacting about 1,600 new taxpayers in this category that owe hundreds of millions of dollars in taxes. The IRS has assigned over 900 of these 1,600 cases to revenue officers, with over $482 million collected so far. This brings the total recovered from millionaires through these new initiatives to $520 million.
Pursuing multimillion dollar partnership balance sheet discrepancies: 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 millions of dollars in discrepancies between end-of-year balances compared to the beginning balances the following year. The number of these discrepancies has been increasing, with many taxpayers not attaching required statements explaining the difference. The IRS announced an initiative to address the balance sheet discrepancy in September and as of the end of October had sent 480 compliance alerts.
Ramp up of audits of 76 largest partnerships leveraging Artificial Intelligence (AI): The complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues and apply resources accordingly. 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. The IRS announced in September that it would expand this program to additional large partnerships. With the help of AI, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. As of December, the IRS had open examinations of 76 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. On average, these partnerships each have more than $10 billion in assets.
Large Foreign-Owned Corporations Transfer Pricing Initiative: The IRS is increasing compliance efforts on the U.S. subsidiaries of foreign companies that distribute goods in the U.S. and do not pay their fair share of tax on the profit they earn of their U.S. activity. These foreign companies use transfer pricing rules year after year to report losses that are engineered through the improper use of these rules to avoid reporting an appropriate amount of U.S. profits. To crack down on this strategy, as of mid-November the IRS has sent compliance alerts to more than 180 subsidiaries of large foreign corporations to reiterate their U.S. tax obligations and incentivize self-correction.
Expansion of the Large Corporate Compliance program: The Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) program focuses on noncompliance by using data analytics to identify large corporate taxpayers for audit. LCC includes the largest and most complex corporate taxpayers with average assets of more than $24 billion and average taxable income of approximately $526 million per year. As new accountants come on board in early 2024, LB&I is expanding the program by 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.
Partnership Self-Employment Tax Initiative: As part of the agency’s increased focus on the tax issues applicable to partnerships and partners, the IRS has been increasing compliance to ensure that Self-Employment Contributions Act (SECA) taxes are being properly reported and paid by wealthy individual partners who provide services and have inappropriately claimed to qualify as “limited partners” in state law limited partnerships (such as investment partnerships) not subject to SECA tax. In contrast to wage earners whose employment taxes (Federal Insurance Contributions Act/FICA) are deducted from their paychecks, self-employed individuals are required to report and pay their SECA taxes on their federal income returns. The IRS efforts to date include more than 80 audits of wealthy individuals. Additionally, in November 2023, the Tax Court issued an opinion in Soroban Capital Partners LP v. Commissioner that agreed with the IRS’s position that the limited partner exception to SECA tax does not apply to a partner who is “limited” in name only. As a result, partners who actively participated in the state law limited partnership must report their partnership share as net earnings from self-employment subject to SECA tax.

New examples of cases closed since the Inflation Reduction Act passed follow:

In January 2024, two individuals were sentenced to 25 years and 23 years respectively in prison for conspiracy to commit wire fraud, aiding and assisting the filing of false tax returns and money laundering for their role in promoting a fraudulent tax shelter scheme involving syndicated conservation easements.
In December 2023, a Swiss Bank entered into a Deferred Prosecution Agreement (DPA) and agreed to pay approximately $122.9 million to the U.S. Treasury for their role in assisting U.S. taxpayer-clients with evading their U.S. taxes by opening and maintaining undeclared accounts. The bank also maintained accounts of certain U.S. taxpayer-clients in a manner that allowed them to further conceal their undeclared accounts from the IRS. In total, from 2008 through 2014, the bank held 1,637 U.S. Penalty Accounts, with aggregate maximum assets under management of approximately $5.6 billion in January 2008, on behalf of clients who collectively evaded approximately $50.6 million in U.S. taxes.
In December 2023, an individual was sentenced to 10 years and 10 months and ordered to pay more than $130,000 in restitution, another was sentenced to 102 months in prison and ordered to pay more than $2.5 million in restitution and a third individual was sentenced to four years in prison and ordered to pay more than $2.5 million in restitution for their involvement in a RICO Conspiracy for cyber intrusion and tax fraud. These individuals used the dark web to purchase server credentials for the computer servers of Certified Public Accounting and tax preparation firms across the country.
In December 2023, an individual was sentenced to 28 months in federal prison and ordered to pay over $470,000 in restitution to the IRS for filing a false tax return while working as a money mule for romance scams. The individual opened and maintained bank accounts to collect proceeds from the schemes and to send the money to himself and others overseas.
An individual was sentenced to 57 months in prison for their failure to pay more than $1.35 million of taxes arising from their operation of several restaurants in the Washington, D.C. area. The individual evaded taxes by concealing assets and obscuring the large sums of money they took from the businesses by purchasing property in the name of a nominee entity and causing false entries in the businesses’ books and records to hide personal purchases using business bank accounts.

Further, the Large Business & International Division's Large Corporate Compliance program is expanding to start an extra 60 audits of the "largest corporate taxpayers" with average assets worth over $24 billion and average taxable incomes of about $526 million per year.

As Congress mulls a government shutdown aversion agreement that could potentially accelerate clawbacks of the Inflation Reduction Act funds, Werfel closed his comments during Thursday's press call by saying that "for this progress to continue, we must maintain a reliable, consistent annual appropriation for our agency as well as keeping inflation Reduction Act funding intact with adequate resources."

The Treasury Department issued a press release breaking down these initiatives, as well as plans to onboard more staff and to improve the taxpayer experience going into tax season.

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