Is non-compliance a problem money can solve? The IRS seems to think so, rolling out last week yet another set of enforcement initiatives based on Inflation Reduction Act funding. Like other recent initiatives that target wealth taxpayers and complex partnerships, these latest IRS initiatives target large corporations.
According to the IRS’ news release linked HERE, the agency is working to ensure large corporate and high-income individual filers pay the taxes they owe. Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers allegedly use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this alleged gap, and in furtherance thereof, announced the following:
- Large foreign-owned corporations transfer pricing initiative: The IRS is increasing compliance efforts on the U.S. subsidiaries of foreign companies that distribute goods in the U.S. and allegedly do not pay their “fair share” of tax on the profit they earn from their U.S. activity. From the IRS’ perspective, these foreign companies report losses or suspiciously low margins year after year through questionable transfer pricing in an alleged effort to avoid reporting an appropriate amount of U.S. profits. To crack down on this perceived strategy, the IRS is sending compliance alerts to approximately 150 subsidiaries of large foreign corporations to reiterate their U.S. tax obligations and incentivize self-correction.
- Expansion of the Large Corporate Compliance program: The IRS’ Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) program focuses on noncompliance by using data analytics to identify large corporate taxpayers for audit. LCC includes the largest and most complex corporate taxpayers with average assets of more than $24 billion and average taxable income of approximately $526 million per year. As new IRS accountants come on board in early 2024, LB&I is expanding the program by starting an additional 60 audits of the largest corporate taxpayers selected using a combination of artificial intelligence and subject matter expertise in areas such as cross-border issues and corporate planning and transactions.
- Cracking down on perceived abuse of repealed corporate tax break: Following the 2017 repeal of a provision of the Internal Revenue Code that provided a deduction for producing goods in the U.S., the IRS received hundreds of claims collectively seeking more than $6 billion in refunds, with a significant portion of filers claiming the deduction for the first time. The IRS launched a campaign to address alleged noncompliance and review high-risk claims in this area. The IRS has reported successful efforts in this initiative, including a significant win in the Tenth Circuit Court of Appeals, which sided with the Tax Court and IRS in denying a refund claim based on a $1.8 billion deduction. The IRS belies that the judicial victory will have far-reaching benefits to the IRS’ ongoing efforts in this space.
- Prioritization of high-income cases: The IRS has been ramping up efforts to pursue high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt. These efforts are concentrated among taxpayers with more than $1 million in income and more than $250,000 in tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, dozens of revenue officers are currently focusing on these high-end collection cases. As announced in September, the IRS has begun contacting about 1,600 new taxpayers in this category that owe hundreds of millions of dollars in taxes. To date, the IRS has already collected $122 million dollars in 100 of the assigned 1,600 cases.
While money can’t solve every problem, it does seem to be solving many of the problems the IRS has faced in its efforts to tackle perceived non-compliance among select groups of taxpayers. Of course the jury is still out on whether the IRS’ perceptions about wealthy individuals, partnership and corporations reflect reality.
