Tax Byte

The IRS has announced the rollout of a sweeping, historic effort to redirect its focus of taxpayer examinations on high-income earners, partnerships, and large corporations. The shift in the agency’s attention to more complex audits comes as a result of increased funding provided to the IRS under the Inflation Reduction Act (IRA) (P.L. 117-169).

Key variables in the IRS’s new audit equation include:

• Prioritization of high-income cases.
  • • The IRS will intensify work on nearly 1,600 identified taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt.
• Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence.
  • • With the use of AI, the IRS has been able 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.
    • By the end of the month, the IRS expects to open examinations of 75 of the largest partnerships in the U.S.
• Greater focus on partnership issues through compliance letters.
  • • Starting in October, the IRS will begin mailing compliance letters to roughly 500 large partnerships with balance sheet discrepancies.
    • Balance sheet discrepancies have been increasing for many years, as many taxpayers are not attaching required statements of explanation.
    • Prior to the IRA, the IRS did have the necessary resources to both follow-up and engage with large partnerships regarding these discrepancies.
    • Depending upon the response to the compliance letters, examinations of these partnerships will be added to the audit stream, according to the IRS.

“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” IRS Commissioner Danny Werfel said. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.”