Written by: Wing Tsoi & Victoria McHale
IRS Cracks Down on Wealthy Taxpayers: What You Need to Know
Key Takeaways:
- The IRS is increasing audit enforcement for high-income individuals, large corporations, and complex partnerships.
- The estimated tax gap due to non-compliance is driving stricter enforcement measures.
- Accurate filing and comprehensive tax records can help mitigate audit risks and penalties.
- Wolf & Company offers personalized tax preparation services to help high-net-worth clients minimize the risk of oversight and proactively plan.
IRS Vows Enforcement on Wealthy Tax Evaders
The Internal Revenue Service (IRS) is turning up the heat on taxpayers suspected of underpaying taxes. According to recent publications from the IRS, the tax gap — the difference between taxes owed and taxes paid — is estimated to be $638 billion. This gap is primarily due to non-filers, income underreporting, and tax underpayment. As a result of this increasing tax gap, the IRS is cracking down and intensifying collections in the coming years to “restore fairness to [our] tax system.”
The Service Inflation Reduction Act Strategic Operating Plan: What it Means for Taxpayers
In 2022, the IRS released the Service Inflation Reduction Act Strategic Operating Plan. This robust Strategic Operating Plan spans fiscal years 2023-2031. The objectives of this plan are to improve taxpayer services and the technological capacity of the IRS. Additionally, the plan aims to develop a skilled workforce to better serve the IRS and its mission. While efficiency and technological advancement are long overdue and will be happily welcomed by the accounting industry, there is one objective the IRS proposes that may put some taxpayers on alert.
The third objective of the Strategic Operating Plan is to “focus expanded enforcement on taxpayers with complex tax filings and high-dollar non-compliance to address the tax gap.” In short, the IRS will increase their audit enforcement on taxpayers they suspect are not fulfilling their tax obligations. With increased audit focus on individuals, corporations, and partnerships, the number of audits among those who have not previously been selected will likely increase.
A few main highlights regarding the upcoming audit focus on taxpayers as it compares to 2019 audit levels:
- Large corporations: Audit rates for corporations with assets exceeding $250 million are expected to nearly triple, rising to 22.6% in 2026, up from 8.8% in 2019.
- Complex partnerships: Audit rates for large, complex partnerships with assets over $10 million are projected to increase nearly tenfold, reaching 1% in 2026, up from 0.1% in 2019.
- Wealthy individuals: Audit rates for individual taxpayers with total positive income exceeding $10 million are expected to increase by more than 50%, rising to 16.5% in 2026, up from 11% in 2019.
Although the IRS is increasing its focus on high-income taxpayers and complex entities, it has reassured that audit rates for small businesses and individuals earning less than $400,000 will not increase and will remain at historically low levels.
The IRS has touted plans for strict taxpayer enforcement over the past few years and is ready to take action. The IRS plans to focus its enforcement efforts on “segments of taxpayers with complex issues and complex returns.” Under this initiative, the IRS will expand its workforce with data scientists, auditors, counsel, international specialists, economists, and engineers. Furthermore, the IRS will deploy enhanced data analytics to select cases based on the highest risks of non-compliance. By increasing their workforce and expertise, they are confident they will identify high-dollar non-compliance among complex tax returns and close the tax gap.
Wolf’s Insight: Preparing High Earners for Audits
- Keep accurate filings: The IRS is taking a significant step forward to address non-compliance and the widening tax gap. Taxpayers should ensure their filings are correct and compliant as the agency moves toward stricter enforcement. It’s important to recognize that increased scrutiny will likely focus on those with complex returns or significant income. By maintaining transparency and accuracy in filings, taxpayers can mitigate the risk of audits and potential penalties. If concerns arise, consulting with tax advisors promptly is advised to address issues before they escalate.
- Remain calm: If your income is below the specified thresholds, your likelihood of being audited is unlikely to increase.
- Notify your Wolf team: Promptly inform your Wolf team if you receive any correspondence from the IRS or state authorities. We will work with you to determine the appropriate response and course of action.
- Don’t assume a notice means an audit: It is common to receive notices from the IRS or state authorities. These do not necessarily indicate a change in your tax situation or that you are being targeted for an audit.
- Update your federal power of attorney forms: There is an option on the form to request that Wolf & Company directly receive copies of all notices on your behalf.
- Maintain comprehensive records: Ensure you keep detailed records of your income and expenses to support your tax compliance. If you need assistance with record-keeping or other accounting solutions, consider Wolf & Company’s Outsourced Accounting Solutions, which offers customized services like general ledger maintenance, audit support, and financial reporting.
How Wolf Supports Private Clients With Tax Preparation
Wolf & Company offers tailored tax preparation services through our Private Client Group, specifically designed to ensure accuracy and compliance for high-net-worth individuals and their families. As the IRS heightens scrutiny on affluent taxpayers, we help clients navigate complex tax regulations, minimizing risks of errors or oversights. Our experienced team provides personalized guidance to ensure all filings meet the latest standards. Our proactive approach strengthens clients’ tax positions and provides confidence that their financial obligations are handled accurately and efficiently.
Ready to learn more? Contact our Private Client Group to get started.