IRS Updates

The IRS announced that it will use the additional funding it received through the Inflation Reduction Act of 2022 (IRA) to restore fairness in compliance by shifting its attention to high-income earners, large partnerships, large corporations and promoters of tax schemes who abuse U.S. tax law. The effort will utilize improved technology and AI to better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid the needless “no-change” audits that burden taxpayers.

As part of its efforts toward tax fairness, the IRS said it would not increase audit rates for taxpayers earning less than $400,000 a year and would add new fairness safeguards for those claiming the earned income tax credit (EITC). The EITC was intended to help taxpayers with modest incomes, but audit rates for those claiming the credit have remained high in recent years, while the rates dropped precipitously for high-income partnerships and taxpayers with complex tax situations. The agency will also work to help protect those claiming the EITC from being exploited by unscrupulous tax preparers.

The expansion of compliance efforts for individuals and partnerships with high income and wealth will include:

Prioritization of high-income cases

The IRS's High Wealth, High Balance Due Taxpayer Field Initiative will intensify its enforcement efforts for taxpayers with incomes of more than $1 million who have more than $250,000 in recognized tax debt. The IRS plans on contacting roughly 1,600 taxpayers who fall into this category and owe hundreds of millions in taxes. The initiative has already collected $38 million from more than 175 high-income earners, and the IRS plans to have dozens of revenue officers focusing on high-end cases in fiscal year 2024.

Utilize AI in large partnership compliance program

The IRS will be expanding the Large Partnership Compliance (LPC) program it launched in 2021 to examine additional partnerships selected with the help of AI. By the end of September, the IRS will be opening examinations of 75 of the country's largest partnerships across a cross-section of industries, including hedge funds, real estate investment partnerships, publicly traded partnerships, law firms and other industries. On average, each of these partnerships has more than $10 billion in assets.

Increased focus on partnership discrepancies

Partnership returns showing discrepancies of millions of dollars between end-of-year balances and beginning balances for the following year are often an indicator of potential non-compliance. Those discrepancies have been increasing in recent years, with many taxpayers not attaching the required statements explaining them. Beginning in early October, the IRS will start mailing compliance letters to about 500 of these partnerships. The agency will use the responses it receives to decide whether the partnerships should be added to the audit stream

The IRS announced a two-year administrative transition period that delays the implementation of the Roth catch-up contribution requirement for high-income participants in retirement plans until 2026. The transition period is included in Notice 2023-62 and is designed to facilitate an orderly transition for compliance with the catch-up requirement for participants in 401(k)s and similar retirement plans that was included in the SECURE 2.0 Act of 2022. Additionally, the announcement clarified that plan participants who are 50 or older can continue making catch-up contributions after 2023, regardless of their income.

Under §603 of the SECURE 2.0 Act, certain catch-up contributions made to an employer retirement plan after Dec. 31, 2023, must be designated as after-tax Roth contributions. The new catch-up rule only applies to employees participating in an employer or governmental retirement plan with prior-year Social Security wages that exceeded $145,000.

The Inflation Reduction Act of 2022 required the IRS to provide Congress with a report on the feasibility of running a direct filing system. In the report, which the agency submitted on May 16, the IRS said many taxpayers are interested in a direct file system, and the agency is capable of executing it. Therefore, the IRS is taking the necessary steps to begin a direct file pilot program for the 2024 filing season so it can assess the customer support and technology necessary to fully implement direct file for all taxpayers.

The IRS will also use the pilot program to determine whether the agency could overcome the potential operational challenges. However, it did note that effectively implementing direct file would require a sustained budget investment and careful management of the program's operational complexity.

The report relied on information the IRS collected through its Taxpayer Experience Survey as well as an independently conducted survey of taxpayers. The IRS plans to supplement that information with user research and usability testing conducted using an internal prototype that will allow the agency to better understand the user's perspective.

IRS officials say the agency is resuming its collection efforts and is expected to issue CP14 notices, Notice of Tax Due and Demand for Payment, to roughly 8 million taxpayers by the end of May. The IRS temporarily stopped collections activities during the COVID-19 pandemic.

Eric Green, a tax attorney who regularly serves as an instructor for NATP webinars on collections issues, said he learned of the IRS's intention to resume issuing the balance due notices during a recent meeting with officials from the agency. “We have been waiting for the tidal wave of IRS rep work to start, and it seems things will be gearing up around Memorial Day,” he said.

Additionally, IRS officials noted the following:

• The IRS has caught up with its mail processing backlog, so there is no longer a concern that the agency is sending notices out to taxpayers who have responded or made payments that had not been opened.
• Taxpayers who owed balances and were due for enforcement action before the pause will probably receive a refresh notice to remind them of the balance due in the hopes that they or their representative will contact the IRS to work out an arrangement before action is taken on a levy.

Enforcement notices will be sent out in waves to avoid overwhelming the IRS's collection phone lines, Office of Appeals and Taxpayer Advocate when taxpayers receive their notices and try to contact the agency.