The Internal Revenue Service (IRS) recently announced a renewed effort to ensure compliance with federal tax law, specifically focusing on high-income earners, partnerships, and large corporations. This additional scrutiny results from the additional funding obtained under the Inflation Reduction Act and increased artificial intelligence capabilities. Under the announcement, the IRS intends to focus specifically on the following:
High-Income Liability Cases
Under the High-Income liability cases, the IRS will prioritize collection efforts on individuals earning greater than $1,000,000 but having federal tax liability in excess of $250,000. The IRS is assigning additional revenue agents and taking further actions to collect on these individuals.
Large Partnership Compliance
Historically, the IRS has examined less than 0.3% of all partnership returns filed. However, under this renewed effort, the IRS uses artificial intelligence (AI) technology to identify potential compliance risks. This effort will focus on partnerships associated with hedge funds, real estate investors, publicly traded partnerships, large law firms, and other industries with an average of $10 billion in assets. In addition, the IRS has increased its scrutiny of partnership (with $10 million or more in assets) returns with significant balance sheet discrepancies with little explanation. While initially this scrutiny will focus on just sending compliance letters, such additional scrutiny could lead to an audit.
With the increased use of cryptocurrency, the IRS is expanding its compliance efforts on the tax obligation associated with this digital asset. In August, the IRS proposed new regulations requiring brokers (including digital asset trading platforms, payment processors, and wallet providers) to report on Form 1099-DA the gross proceeds for the sale or exchange of any digital asset (i.e., cryptocurrency). In addition, in situations where cryptocurrency is used for real estate transactions, any real estate reporting persons (e.g., title company, closing attorney, mortgage lender, or real estate broker) will be required to report on Form 1099-S, Proceeds from Real Estate Transactions, the fair market value of the digital asset that was paid to the seller for the real estate transaction. This requirement will be effective for any transactions occurring on or after January 1, 2025.
Foreign Bank Account Disclosure
Under US Federal law, US persons continue to have tax reporting obligations for money earned overseas and financial interest in foreign financial accounts. Under the new compliance efforts announced, the IRS has identified hundreds of possible taxpayers who have not filed the necessary disclosure of their foreign accounts. The IRS intends to increase significant scrutiny on non-compliance with the reporting of foreign accounts by US persons.
What Steps Should You Take to Decrease Your Audit Risk?
So, what steps can you take to decrease your audit risk and increase your compliance?
- Ensure that you’re working with a reputable and knowledgeable tax professional. Avoid tax promoters or individuals who promise low taxes without thoroughly examining your tax situation.
- Understand your tax compliance obligations. The tax code can be complex, especially when adding state, local, and international tax requirements. Therefore, it is essential to understand your tax obligations, including reporting, withholding, and tax payment requirements.
- Document, Document, Document. Whether taking a unique tax position or conducting a complex transaction, documenting the particular tax position (i.e., keeping the receipts) is an important step. Under IRS guidance, additional penalties can apply for significant underreporting of tax obligations. However, penalty relief may be available in situations with a reasonable basis for the particular position. Documenting your tax position and the specific reason for that position may allow for penalty relief if you are audited.