The IRS has announced it will use funds from its Inflation Reduction Act (IRA) to invest in new AI tools to help crack down on thousands of millionaires and large businesses partnerships that owe the agency huge amounts in back taxes.
In a new statement, the Internal Revenue Service (IRS), which is the federal agency responsible for collecting federal taxes and enforcing US laws, said it is shifting its attention to “the wealthy” from working-class taxpayers.
And to assist in the work, it will be using Artificial Intelligence (AI) and improved technology to identify sophisticated schemes to avoid taxes.
The IRS says it will centre on “adding more attention on wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade”.
The changes will be driven with the help of improved technology as well as Artificial Intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless “no-change” audits.
Prior to the IRA (the Inflation Reduction Act which was signed into US law last year and contains $500bn in new federal spending) the IRS says it did not have the resources needed to follow-up and engage with all the large partnerships with such discrepancies.
However, with the funds now in place, it plans to start ramping up its efforts from early October.
And the US is not alone in cracking down on the rich, a wealth tax looms North of the Border, with the First Minister of Scotland Humza Yousaf seeing a wealth tax as an answer to a £1 billion hole in his spending plans for next year.
TAX RAID ON THE RICH
“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said IRS Commissioner Danny Werfel.
“There is a sea change taking place at the IRS in every aspect of our operations,” he continued. “Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse.
“We will increase our compliance efforts on those posing the greatest risk to our nation’s tax system, whether it’s the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation’s tax system,” he added.
Key elements of the new effort will include:
Prioritisation of high-income cases. In the High Wealth, High Balance Due Taxpayer Field Initiative, the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt.
Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI). In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population.
The IRS is now expanding the LPC program to additional large partnerships. With the help of AI, the selection of these returns is the result of a collaboration among experts in data science and tax enforcement, who have been applying cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage.
By the end of the month, the IRS says it will open examinations of 75 of the largest partnerships in the US that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.
Greater focus on partnership issues through compliance letters. The IRS says it has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance.
The IRS says: “Taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year. The number of such discrepancies has been increasing over the years.
“Many of these taxpayers are not attaching required statements explaining the difference.” It says this effort will focus on high-risk large partnerships to quickly address the balance sheet discrepancy,” it added.
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