The Internal Revenue Service is going after hedge funds, big law firms, partnerships and more millionaires as compliance continues, the Internal Revenue Service commissioner said.
A year after Congress approved billions in additional funding for the IRS to improve operations and revive high-quality tax enforcement that had languished over the past decade, the agency is now getting more specific about where it plans ensure that all taxes due are collected.
The IRS is also refining its methods for detecting enforcement targets, using artificial intelligence in certain cases.
The IRS has its eye on about 1,600 millionaires who each owe at least $250,000 in tax debts. All told, they owe “hundreds of millions of dollars,” Werfel said. The agency said in July that it has already collected $38 million in back taxes from 175 millionaire taxpayers.
“These are sweeping and historic changes that will alter the landscape of our compliance work,” IRS Commissioner Danny Werfel told reporters Thursday evening.
““These are sweeping and historic changes that will alter the landscape of our compliance work.””
Audit rates from the increasingly cash-strapped IRS have fallen in recent years for all income levels, but especially for extremely wealthy taxpayers.
Various estimates exist regarding the gap between taxes owed and taxes actually paid. In 2021, Werfel’s predecessor Charles Rettig said the amount could be as high as $1 trillion annually because the tax authorities did not have the resources to delve into many complex returns.
The latest announcement from the IRS is the agency’s latest attempt to narrow that gap.
There will also be a new set of audits for 75 major partnerships, Werfel said. These entities include hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms.
The organizations – which each have an average of $10 billion in assets – will be notified of the audits in the coming weeks, Werfel said.
These types of audits are complicated and even after investigation, an audit may not yield anything for the tax bill. IRS officials are betting that these assessments will generate additional tax revenue after using artificial intelligence to detect suspicious patterns and trends.
“IRS will renew efforts to audit hedge funds, real estate investment partnerships, publicly traded partnerships and large law firms.”
The IRS doesn’t know how much it can collect from these partnerships and the process can be lengthy and litigious, Werfel said. “But we absolutely believe this is the right thing to do to ensure tax fairness,” he said.
Starting next month, the IRS will also send letters to about 500 partnerships worth at least $10 million. The IRS has questions about their balance sheets and if the agency is not satisfied with the answers, more audits may follow.
The IRS is also stepping up scrutiny of taxpayers with cryptocurrency holdings and offshore bank accounts, Werfel said.
The Inflation Reduction Act, which took effect in August 2022, provided $80 billion to improve workforces and increase the number of audits for companies and wealthy taxpayers. The money will not be used to strengthen enforcement of households making less than $400,000, Biden administration officials said.
In their fight to raise the debt ceiling earlier this year, the White House agreed with Republican negotiators to reallocate $20 billion of that $80 billion.
Friday’s enforcement announcements are concrete next steps for an agency eager to show how it plans to use the money to upgrade — especially as negotiations continue over the annual base budget.
The audits require staff with the skills to search complex returns. But the IRS still has a long way to go to get people ready for the job, a recent Watchdog report found.
The agency’s Large Business and International division had a net loss of 82 revenue agents in fiscal 2023, as 97 departing agents brought on more than 15 new hires, according to a report from the Treasury Department’s inspector general.
In the agency’s Small Business/Self-Employed division, there was a net loss of 186 revenue agents, the report said this week.
The IRS aims to return to a workforce of 90,000 full-time employees, which hasn’t happened in more than a decade, Werfel noted.
Initial hires included 5,000 customer service representatives, and additional audit staff is the next step, Werfel said. Meanwhile, he said the agency is also moving staff to senior audits as recruitment efforts continue.
“We have more work to do in hiring exam staff. It’s going to be a very busy fall for us on that front,” he said.