On September 8, 2023, the IRS announced a “sweeping effort” to target America’s wealthiest taxpayers. IRS Commissioner Daniel Werfel described enforcement actions, which will be funded by the Inflation Reduction Act of 2022 and will include the scrutiny of returns filed by 75 partnerships with over $10 billion in assets; 500 partnerships with over $10 million in assets; and 1,600 individual millionaires.
The IRS is using updated technology, including Artificial Intelligence (AI), to identify which tax returns to examine. This technology is “the result of groundbreaking collaboration among experts in data science and tax enforcement.” According to Commissioner Werfel, “[n]ew tools are helping us see patterns and trends that we could not see before and, as a result, we have higher confidence on where to look and find where large partnerships are shielding income.” Until now, the IRS “has simply not had the resources or staffing to address partnerships; in a real sense, we’ve been overwhelmed in this area for years.” Inflation Reduction Act funds are supplying those resources and staffing.
The IRS continued this drumbeat on September 20, 2023, with its announcement of plans “to establish a special area to focus on large or complex pass-through entities.” This new area will fall within the IRS Large Business & International operating division and will be staffed in part with new employees hired to focus on “complex partnerships, large corporations, and high-income and high-wealth individuals.”
Commissioner Werfel explained that developing this new team “is another part of our effort to ensure the IRS holds the nation’s wealthiest filers accountable to pay the full amount of what they owe. … We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns. This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come.” The IRS efforts are designed to reverse what Commissioner Werfel described as, “years of underfunding” that has “led to the lowest audit rate of wealthy filers in our history.”
That low audit rate is indeed rising in connection with three categories of wealthy taxpayers:
- 75 Largest Multibillion-Dollar Partnerships in the U.S.: By the end of this month, the IRS will “open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries” and that, on average, have more than $10 billion in assets.
- 500 Multimillion-Dollar Partnerships: The IRS has “identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance.” In early October, the IRS will begin mailing approximately 500 such partnerships. If dissatisfied with a partnership’s response, the IRS may begin an audit.
- 1,600 Individual Millionaire Taxpayers: The IRS “will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt” by contacting about 1,600 such taxpayers, with “dozens of Revenue Officers focusing on these high-end collection cases in FY 2024.”
Over the past 75 years, Kostelanetz LLP has built a global reputation as a law firm of choice for clients facing high-stakes controversies and negotiations with government agencies.
Our attorneys include a former Acting Assistant Attorney General of the Department of Justice (DOJ) Tax Division, immediate past Chief of the IRS Criminal Investigation Division, former DOJ Tax Division trial and appellate attorneys, and others with significant government experience. As a result, Kostelanetz LLP attorneys are particularly well positioned to represent taxpayers that find themselves subject to these heightened enforcement efforts and are regularly called upon to handle the most challenging and sensitive cases and internal investigations.
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