The IRS is Flush with Funds, Now What?

As part of the 2022 Inflation Reduction Act, the Internal Revenue Service (IRS) received substantial funding in the form of tens of billions of dollars. With this influx of funds, the question arises: what will the IRS do with funding? While some may hope for a simplified federal taxation system, this authority rests with Congress (good luck).

The IRS is laser focused on devoting a considerable portion of this funding toward compliance enforcement, commonly known as tax audits, to decrease the “tax gap,” which is the difference between taxes owed and taxes collected.

To bridge this gap, the IRS is focusing on high-net-worth individuals, wealthy non-filing individuals and pass-through entities such as partnerships with over $10 million in assets. The IRS is enlisting the help of advanced technology, including AI, and recruiting a highly skilled workforce of accountants, engineers, economists, data scientists, attorneys and tax professionals with the specialized skills to examine the complex returns of high-net-worth individuals and address high-dollar noncompliance issues.

By 2026, the IRS intends to increase audit rates by more than 50% (compared to 2019 audit rates) for individuals with $10 million or more in income.

Earlier this year, the IRS resumed issuing collection notices for high-income non-filers who are estimated to contribute roughly $77 billion to the delinquent filing tax gap.

Weaver’s Tax Controversy Insight

A noticeable increase in IRS audit activity has occurred over the past 10 months, with no signs of slowing, focusing on high-net-worth individuals and pass-through entities. Many of these audits are under the purview of the IRS’ global high-wealth unit, who examine not only the individual’s income tax return but also extend to entities in which the individual holds significant interest in or influence over like partnerships, trusts, corporations and S corporations.

A few areas of IRS interest in individual audits include:

• Challenging whether activities reported on Schedule C (profit or loss from business) and Schedule F (profit or loss from farming) are genuinely for-profit ventures or merely hobbies
• Scrutinizing non-cash charitable donations and the valuations of such donations

If you have these tax positions, or are under the global high-wealth purview, reach out for assistance. Weaver can provide the support you need. Contact us to learn more.

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