IRS Plans to Use AI and Ramp Up Enforcement on Millionaires, Partnerships and Crypto

Recently, IRS Commissioner Danny Werfel spoke of changes within the IRS, announcing several initiatives focusing on high-income earners and partnerships, as well as integrating the use of AI within the agency’s work. According to the commissioner, the initiatives were made possible by additional IRS funding provided by the Inflation Reduction Act. Without the funding from this bill, the agency would not have the budget to implement these ramp-ups in enforcement.

Millionaires with Tax Debt

The new initiative on millionaires is not just because they are high-earning taxpayers; it will focus on those with open tax debt. Currently, the IRS has identified approximately 1,600 millionaires who are in debt to the IRS for $250,000 or more. The agency plans to designate agents to focus on these high-impact collection cases. A prior campaign resulted in a collection of more than $38 million in tax debt.

High-Income Earners with Foreign Bank Accounts

Another new initiative focusing on high-earning taxpayers includes ramped-up inspection for those who have foreign bank accounts and use them to evade taxes.

By law, every U.S. resident who has a financial interest in or control over a foreign financial account must disclose this information if he or she had $10,000 or more at any point in the year by filing an FBAR.

The IRS conducted an analysis and identified potentially hundreds of taxpayers who should be filing an FBAR and are not, with average balances of more than $1 million. The most egregious cases are planned to be audited in fiscal year 2024.

Partnerships and Corporations

Starting in 2021, the IRS began the initial stages of a new compliance program focusing on complex partnership tax returns. Now, the IRS is set to expand this initiative over more partnerships.

In total, the IRS has plans to open examinations on the 75 biggest U.S. partnerships. “Biggest” means these businesses have, on average, more than $10 billion in assets, so it’s safe to say small and medium size businesses won’t be affected.

Additionally, the IRS will be looking into smaller (but albeit still large) partnerships with more than $10 million in total assets that have balance sheet mismatches. The focus is on partnerships with balance sheet discrepancies where the prior year’s ending balance sheet is not equal to the next year’s opening balance sheet without any explanation. The IRS uses this as a red flag because they have found through full inspections that balance sheet issues are often the proverbial canary in the coal mine for other areas of non-compliance.

Once again, the focus will be on larger partnerships with balance sheet mismatches. The agency plans to send notices to approximately 500 partnerships. Depending on the initial follow-up, an audit may result.

Digital Assets, Including Crypto

The IRS plans to continue its virtual currency compliance campaign, educating taxpayers on the rules, regulations, and reporting obligations surrounding cryptocurrencies. The rules around the taxation of digital assets have evolved in recent years, and more and more taxpayers are invested in these types of assets.

The IRS subpoenaed transaction information from centralized exchanges and found that potentially an estimated 75 percent of taxpayers involved in crypto are non-compliant, some as a form of tax evasion and others simply from ignorance. In any case, the IRS plans to ramp up digital asset enforcement this coming year.

Artificial Intelligence

Lastly, the IRS is looking to utilize artificial intelligence to help agents do their job more effectively. The IRS is particularly interested in how AI can help flag tax returns for audit in important areas.

The agency plans to invest in the latest analytic solutions that can detect patterns, trends, and activities that are typically linked to tax evasion, thereby freeing up employees to focus on other matters.

Conclusion

Overall, the IRS’s focus is on high-income, tax-debt-burdened individuals, the largest partnerships, and sizable crypto players. This means that these enforcement campaigns shouldn’t have much of an impact on the average taxpayer. However, the growing use of AI will impact everyone from top to bottom.