IRS Boosts Tax Collections Through AI and New Funding From The Inflation Reduction Act

01/19/2024

IRS Boosts Tax Collections Through AI and New Funding From The Inflation Reduction Act

The Inflation Reduction Act enhances the IRS oversight of large corporations and affluent tax evaders and over $482 million was reclaimed from 1,600 millionaires with unpaid tax debts.

IR-2024-09, Jan. 12, 2024

WASHINGTON — Today, the Internal Revenue Service reported significant advancements in its crackdown on high-income individuals, major corporations, and intricate partnerships with the enforcement of Inflation Reduction Act. This is part of a broader initiative to revamp the agency.

Danny Werfel, IRS Commissioner, emphasized that resources from the Inflation Reduction Act are being effectively utilized in various sectors. Beyond previously mentioned improvements in taxpayer services for the 2024 filing season, the IRS is utilizing these resources to enhance enforcement against complex partnerships, large corporations, and wealthy individuals who are behind on their taxes.

The IRS has also updated its enforcement strategy regarding the Inflation Reduction Act, particularly focusing on individuals using partnerships to dodge self-employment taxes. Additionally, the IRS continues to chase millionaires who owe substantial tax debts. Following the collection of $122 million reported in late October, an extra $360 million has been secured. To date, the IRS has recovered a total of $482 million from 1,600 millionaires and continues to pursue these cases.

“Werfel stated that the IRS is intensifying its examination of high-income taxpayers to counteract the historically low audit rates and the minimal attention previously given to the wealthiest individuals and entities before the Inflation Reduction Act. To ensure that taxpayers with the highest incomes, including partnerships, major corporations, and the very wealthy, comply with federal law, the agency is expanding its workforce and technological capabilities,” Werfel remarked. “Simultaneously, we are enhancing our services for diligent taxpayers by providing more face-to-face and online support, as part of our commitment to ensuring a smooth tax season in 2024. The additional resources received by the IRS are already benefiting taxpayers, and we aim to further these advancements in the coming months.”

Werfel presented these updates as part of the quarterly briefing on the IRS Strategic Operating Plan, an initiative driven by IRA funding. With these measures to boost compliance among high-income taxpayers, complex partnerships, and large corporations, the IRS is also dedicated to improving customer service and updating its core technological infrastructure.

Securing Compliance Among Complex Partnerships, Large Corporations, and Affluent Individuals under the Inflation Reduction Act

The IRS is actively ensuring that high-income individuals, large corporations, and major partnerships fulfill their tax obligations with the enforcement of the Inflation Reduction Act. Before the Inflation Reduction Act, over ten years of budget reductions hindered the IRS’s ability to match the growing complexity of methods used by the wealthiest taxpayers to conceal their income and avoid tax payments. Now, the IRS is taking decisive and robust measures to bridge this gap.

High-Income Case Focus: The IRS has escalated its actions against high-income and wealthy individuals who haven’t filed tax returns or have outstanding tax debts. Numerous revenue officers are now specifically tasked with these high-value collections. This push targets individuals earning over $1 million with tax debts exceeding $250,000. As an early achievement, the IRS has secured $38 million from over 175 high-income taxpayers. Last autumn, the IRS initiated contact with approximately 1,600 taxpayers in this group, who collectively owe hundreds of millions in taxes. Of these, over 900 cases have been allocated to revenue officers, yielding over $482 million in collections. The total amount reclaimed from millionaires under these initiatives has now reached $520 million.

Addressing Major Discrepancies in Partnership Balance Sheets: The IRS has detected persistent variances in the balance sheets of partnerships holding assets exceeding $10 million, suggesting possible non-compliance. There are noticeable differences amounting to millions of dollars between the year-end and subsequent year-start balances in partnership returns. The frequency of such discrepancies is on the rise, and often, the taxpayers fail to provide the mandatory explanations for these differences. In response, the IRS launched a program in September to tackle these balance sheet irregularities. By the end of October, the agency had issued 480 compliance notices related to this initiative.

Intensifying AI-Assisted Audits for Top 76 Partnerships: To address the intricate tax structures and issues in large partnerships, the IRS has adopted a targeted strategy. This involves identifying the most significant risks and allocating resources effectively. The IRS initiated the Large Partnership Compliance (LPC) program in 2021 to scrutinize some of the most complex partnership returns. In September, the IRS declared an expansion of this program to include more large partnerships. Utilizing Artificial Intelligence (AI), this expansion is a collaborative effort between data science and tax enforcement experts. They employ advanced machine learning to detect potential compliance risks in partnership taxation, general income tax, accounting, and international taxation. These are areas where historically there’s been minimal examination. As of December, the IRS has commenced examinations of 76 of the largest U.S. partnerships, spanning various sectors such as hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms. These partnerships on average manage assets exceeding $10 billion.

Enhanced Scrutiny on Transfer Pricing by Foreign-Owned U.S. Corporations: The IRS is stepping up its compliance measures against U.S. subsidiaries of foreign companies involved in distributing goods within the U.S. but not adequately paying taxes on their profits from these activities. These subsidiaries frequently exploit transfer pricing rules to declare losses, a tactic that improperly minimizes their reported U.S. earnings. To curb this practice, by mid-November, the IRS had issued compliance notices to over 180 such subsidiaries. These alerts serve to remind them of their tax responsibilities in the U.S. and encourage voluntary correction of their tax reporting practices.

Broadening the Large Corporate Compliance Initiative: The Large Business & International Division (LB&I) is enhancing its Large Corporate Compliance (LCC) program, which targets noncompliance among large corporations through data analytics for audit selection. This program specifically deals with the most sizable and intricate corporate taxpayers, those averaging over $24 billion in assets and about $526 million in taxable income annually. With the arrival of new accountants in early 2024, LB&I plans to extend this program, initiating an additional 60 audits. These audits will focus on the largest corporate taxpayers, identified through a blend of artificial intelligence and expert knowledge in fields like cross-border dealings and corporate strategy and transactions.

Strengthening Enforcement on Partnership Self-Employment Taxes: The IRS is intensifying its enforcement of the Inflation Reduction Act to ensure compliance with the Self-Employment Contributions Act (SECA) taxes, particularly focusing on individual partners in partnerships. This includes wealthy partners who provide services but have incorrectly classified themselves as “limited partners” in state law limited partnerships (like investment partnerships), thereby evading SECA taxes. Unlike salaried employees, whose employment taxes under the Federal Insurance Contributions Act (FICA) are automatically deducted, these self-employed partners are obligated to declare and pay SECA taxes through their federal income tax returns. The IRS has conducted over 80 audits targeting such wealthy individuals. In a notable development, the Tax Court in November 2023 supported the IRS’s stance in Soroban Capital Partners LP v. Commissioner. The court ruled that the limited partner exception does not apply to partners who are merely nominal and not truly limited. Consequently, such partners must report their income from these partnerships as self-employment earnings, subject to SECA tax.

New examples of cases closed since the Inflation Reduction Act passed follow:

Inflation Reduction Act

In January 2024, a court sentenced two individuals to prison terms of 25 and 23 years for their participation in a tax fraud scheme involving syndicated conservation easements. Their crimes included conspiracy to commit wire fraud, assisting in filing false tax returns, and engaging in money laundering activities.

In December, a Swiss Bank agreed to a Deferred Prosecution Agreement (DPA) and will pay an estimated $122.9 million to the U.S. Treasury. This action is in response to the bank’s role in helping U.S. clients evade taxes by establishing and managing undisclosed accounts. Furthermore, the bank managed these accounts in a way that allowed clients to keep them hidden from the IRS. Between 2008 and 2014, the bank had 1,637 U.S. Penalty Accounts with a total of roughly $5.6 billion in assets under management as of January 2008. These accounts were associated with clients who evaded paying around $50.6 million in U.S. taxes.

In December, three individuals received prison sentences for their roles in a RICO Conspiracy involving cyber intrusion and tax fraud. The first individual was sentenced to 10 years and 10 months and must pay over $130,000 in restitution. The second individual received a 102-month prison sentence and was ordered to pay more than $2.5 million in restitution. The third person was sentenced to four years in prison and also must pay over $2.5 million in restitution. These individuals engaged in criminal activities by using the dark web to acquire server credentials for computer servers of Certified Public Accounting and tax preparation firms nationwide.

In December, an individual received a 28-month federal prison sentence and was ordered to pay over $470,000 in restitution to the IRS. This sentence was for filing a fraudulent tax return while acting as a money mule in various romance scams. The individual’s role involved opening and operating bank accounts to gather money from these scams and then distributing the funds to themselves and accomplices overseas.

A person was sentenced to 57 months in prison for failing to pay taxes exceeding $1.35 million, accrued from running several restaurants in the Washington, D.C. region. The individual engaged in tax evasion by camouflaging assets and masking large amounts of money extracted from these businesses. They accomplished this by acquiring property under a different entity’s name and manipulating the business’s financial records to obscure personal expenditures made using the business accounts.

Recruiting More Expertise to Target High-Income Persons, Intricate Partnerships, and Major Corporations

In November and December, the IRS extended job offers to over 560 new proficient accountants, crucial for intensifying efforts against affluent individuals, complex partnerships, and large corporations evading taxes. Significantly, the IRS has revamped its recruitment procedures and hosted numerous direct hiring events to effectively rival private sector opportunities and swiftly onboard exceptional candidates for the enforcement of the Inflation Reduction Act.

Take, for instance, a notable hiring event in Houston in December, where the IRS recruited 160 skilled accountants within just two days. This approach significantly shortened the usual hiring timeline of three to six months. The events are well-publicized beforehand, and the Human Capital Office staff onsite assess each candidate’s qualifications for the role. After this preliminary evaluation, candidates undergo interviews with hiring managers, followed by a review from selecting officials for a final decision. Those who are successful receive provisional job offers, undergo sponsorship and fingerprinting on the spot, with only background and tax checks remaining.

Enhancing Service to Taxpayers

The IRS is committed to assisting taxpayers in correctly filing their returns from the start, ensuring they claim all eligible credits and deductions, and minimizing the need for subsequent corrections and communications with the agency. In pursuit of this goal, the IRS is striving to enable taxpayers to interact smoothly with the agency through their preferred methods, whether it be by phone, in-person, or online. Emphasizing the expansion of in-person services, the IRS aims to reach taxpayers, especially those in underserved and rural areas. This includes the ongoing enlargement of Taxpayer Assistance Centers nationwide.

Establishing Taxpayer Assistance Centers: Since the enactment of the Inflation Reduction Act, the IRS has opened or reopened a total of 54 Taxpayer Assistance Centers. This includes the opening of four new centers since November:
- Bellingham, Washington
- Eau Claire, Wisconsin
- Washington, Pennsylvania
- Media, Pennsylvania

The Taxpayer Assistance Centers, delivering direct support to communities across the nation, will extend their in-person service by over 8,000 hours beyond what was offered in the last tax season.

Update on Taxpayer Assistance Center Staffing: By the end of December, the IRS successfully hired 858 personnel to work in Taxpayer Assistance Centers. This marks a net gain of 410 staff members compared to the staffing levels in Fiscal Year 2022. The IRS is also actively hiring new employees to fill positions vacated by departing staff.

Taxpayers should expect the same level of functionality in their online IRS accounts as they do with their banking or other financial services. According to the Strategic Operating Plan, within the next five years, taxpayers will be able to securely submit all documents and address all notices online. They will also have the ability to securely access and download their data and account history. The IRS has already achieved or is actively working on several key milestones towards this objective. These include the introduction of the Business Tax Account, broadening the Document Upload Tool to accommodate responses to almost all notices and letters, and rolling out digital forms that are adaptable to mobile devices.

Online Response to Notices: Taxpayers now have the capability to respond to IRS notices online. Before the 2023 Filing Season, responses to notices, such as those for document verification, were typically done through mail. However, during the 2023 Filing Season, taxpayers were given the option to respond online to 10 of the most common notices related to credits like the Earned Income and Health Insurance Tax Credits, offering a more convenient and cost-effective method. By July 2023, this online response feature was expanded to include 61 different IRS notices and letters. By October 2023, it became possible for taxpayers to respond online to all notices and letters that don’t require a filing or payment action. As of December, the IRS has processed over 45,000 notice responses through this online tool.
Introduction of Tax Forms Processing Status Dashboard: The IRS has introduced a new public dashboard titled “Processing Status for Tax Forms.” This dashboard displays the current processing status for key tax forms (such as 1040, 941) and general correspondence. Additionally, the “IRS operations: Status of mission-critical functions” webpage has been updated to include a link to this new dashboard. For forms submitted electronically, the processing status indicates the typical number of days currently required to process a form after its receipt from the taxpayer. For paper submissions, the processing status shows which month’s received forms are currently being processed. The IRS has focused on including forms that are frequently submitted in paper format and necessitate further action from the taxpayer once processed, such as forms leading to refunds or the issuance of an Individual Taxpayer Identification Number (ITIN). This page is updated on a weekly basis to accurately reflect the latest processing statuses.
Introduction of Voice Bots for Refund and Amended Return Inquiries: The IRS has implemented natural language voice bots for taxpayers who call regarding their refunds and amended returns. These voice bots enable callers to interact using everyday language, rather than navigating through traditional menu-driven prompts. This advancement allows for a more intuitive and user-friendly experience when seeking information about refunds or the status of amended tax returns.

Moreover, the IRS is consistently enhancing the capabilities of various online platforms:

Following recent enhancements to the Individual Online Account system, users can now store several bank account details, verify their bank account information, and view the names of their banks. Additionally, individuals have the ability to schedule and cancel payments, as well as modify and extend their payment plans.
The IRS has introduced the second phase of the Business Tax Account, enhancing its capabilities and extending eligibility to various entity types. This expansion now allows individual partners in partnerships and individual shareholders in S corporation businesses to qualify for a business tax account, in addition to sole proprietors with an employer identification number (EIN). Eligible entities can utilize the platform to access business tax transcripts and view digital notices and letters.
Improvements to the Tax Pro Account now enable tax professionals to effectively handle active client authorizations through the Centralized Authorization File (CAF) database. They can also oversee and manage active authorizations and access tax information for both individual and business clients, including details such as business balance due and the status of canceled and returned checks for individuals.

Upgrading Technological Infrastructure

On the technological front, the IRS is in the process of modernizing its aging technology infrastructure. This initiative is aimed at enhancing the agency’s ability to deliver top-notch customer service and safeguard taxpayers’ data.

Digital Transformation: The IRS is also making significant strides in the digitization of its operations, particularly in scanning and e-filing paper returns. By the conclusion of February, the IRS will have replaced scanning equipment that is over five years old, along with automated mail-sorter machines in its six highest-volume locations. This upgrade will streamline the process of sorting, opening, and scanning mail. By the conclusion of December, the IRS had successfully digitized more than 1.5 million forms in the 2023 calendar year. This digitization effort encompassed a variety of forms, including over 484,000 Forms 940, 907,000 Forms 941, and more than 111,000 Forms 1040. The shift toward digitization holds considerable potential for enhancing IRS service delivery.

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