Werfel: Enforcement Initiatives Homing in on Partnerships, Large Corps

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.

Since August, focused compliance initiatives brought in $360 million, brining the total amount collected from a combined 1,600 millionaires to $482 million. One such initiative targets partners “who try to evade self-employment tax by using an exemption that applies specifically to limited partners, even though they don’t qualify as such,” Werfel said, adding that so far, these efforts span across 80 audits of wealthy individuals.

The IRS is also utilizing artificial intelligence in conjunction with subject matter experts to close gaps in audit coverage of a “cross section of industries,” such as hedge funds, real estate investment, large law firms, and more. By December, the IRS had 76 open examinations of partnerships with an average of $10 billion in assets. “It’s been exciting to see experts in data science and tax enforcement apply cutting-edge technology, including artificial intelligence to identify potential noncompliance among these taxpayers,” Werfel remarked.

Additionally, the IRS identified another group of partnerships – those with over $10 million in assets – that have “ongoing discrepancies” on their balance sheets. An initiative to hash out these issues launched in September and the IRS reported it sent 480 compliance alerts as of the end of October. “The number of these discrepancies has been increasing, with many taxpayers not attaching required statements of explanation,” the commissioner said.

As for large corporations, the IRS is particularly interested in US subsidiaries of foreign companies that distribute goods stateside but underpay tax on profits attributable to US activity. “These foreign companies improperly use transfer pricing rules year after year to report losses instead of an appropriate amount of US profits,” explained Werfel. As of mid-November, 180 such entities were sent compliance alerts.

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 the following day breaking down these initiatives, as well as plans to onboard more staff and to improve the taxpayer experience going into tax season.