In the Crosshairs: IRS Increasing Audit and Compliance Efforts for High-Income Households

The IRS recently announced that high-income households will be the target of increased enforcement efforts after the agency reopened on July 15. The Service is aiming to increase compliance amongst high-income taxpayers following a Treasury Inspector General for Tax Administration report earlier this year finding that billions of tax revenue is being lost due to lax enforcement against high-income individuals who fail to report substantial income or fail to file tax returns. The IRS has outlined a two-pronged initiative focusing on certain business owners and non-filing individuals.

Douglas O’Donnell, commissioner of the IRS’s Large Business & International Division, reported last month that the IRS is preparing to audit several hundred high-income households that own pass-through entities (i.e., partnerships, limited liability companies, and S-Corporations) or are connected with a private foundation. Treasury Secretary Steven Mnuchin reported during a Ways and Means Committee hearing that the IRS will receive increased funding specifically to conduct more high-income audits. Audit commencement letters for targeted households are expected to be sent starting July 15  of this year.

The IRS has outlined a comprehensive approach to these high-income audits which will include examining businesses and organizations affiliated with the individual. Such an approach will emphasize the recently updated partnership audit rules, the qualified business income deduction under Section 199A, and tax benefits associated with private foundations. The added complexity of these audits underscores the importance that taxpayers be represented by competent tax counsel to mount a coordinated audit defense.

The IRS will also be contacting high-income individuals who have not filed 2019 tax returns. The IRS has reportedly “touched” every high-income nonfiler for tax years 2017 and 2018. Following TIGTA’s report, the Service has good reason to contact with those who have not filed a 2019 tax return. In a February release, the IRS identified high-income, non-filing taxpayers as those who received $100,000 or more of income during the tax year but failed to file a return. These taxpayers should be easily identifiable through information reports, such as Forms W-2 and 1099, filed by employers, bankers, brokers, and other taxpayers. Failing to file a tax return carries with it a host of risks for a taxpayer, such as the imposition of interest and penalties and criminal prosecution. Moreover, the IRS may pursue claims against taxpayers at any time since there is no statute of limitations for nonfilers. The IRS has prosecuted cases against taxpayers for failure to file returns and pay taxes where the noncompliance was discovered because of other investigations. Al Capon, Ross Ulbrichct the founder of the Silk Road, and Derek Chauvin, the police officer who choked George Floyd, are all prominent cases that come to mind.

Taking proactive steps to minimize tax audits are important to protect your personal and business assets. We advise clients who have complex tax situations including those involving pass-through entity ownership and private foundations. For questions concerning how you may be affected by the new IRS audit initiatives, contact a member of our Taxation Practice Group today.