IRS Goes After Wealthy Tax Scofflaws as More Complex Cases Brew

Enforcement actions against wealthy taxpayers the IRS is touting are largely clear-cut and don’t reflect more complicated enforcement issues on the horizon, those following the agency said.

IRS Commissioner Daniel Werfel on July 13 noted several recent efforts to go after wealthy people who aren’t paying taxes they owe, as part of an effort to promote the agency’s work following the enactment of last year’s tax-and-climate law. These include closing about 175 delinquent tax cases involving millionaires, intensifying work concerning wealthy non-filers, identifying about 100 high-income individuals who are claiming tax breaks in Puerto Rico that they aren’t eligible for, and stepping up scrutiny of pension plan transactions in Malta.

Other enforcement issues the agency will hope to focus on in the future, such as partnerships and certain tax schemes the agency considers abusive, are more complex and will involve hiring more employees who have technical expertise, officials at think tanks and advocacy groups said.

The IRS is aiming to use much of the tax-and-climate law funds to counteract years of audit-rate declines from budget cuts and dips in staffing levels, but will need to hire and train new personnel before some of its enforcement goals are realized.

“Some of these are relatively low-hanging fruit involving more factual issues than issues of law,” particularly the instances involving Puerto Rico tax breaks, said Pete Sepp, president of the right-leaning National Taxpayers Union.

The areas the IRS highlighted last week “are ones that probably won’t require huge initial expenditures in enforcement and compliance infrastructure,” Sepp added.

Recovering Millions

The IRS initially received about $80 billion in multiyear funding in the Inflation Reduction Act, $45.6 billion of which was allocated to enforcement. But much of that enforcement money is set to be rescinded under an agreement between the White House and congressional Republicans to raise the debt limit. And now, House Republicans want to reduce the IRS’s annual appropriations for enforcement by about $1.2 billion on top of the reduction in tax-and-climate law funds.

As Congress debates the future of IRS funding, the agency is trying to make the case against cuts by highlighting its recent work to bolster enforcement as well as taxpayer services and technology.

The recently closed delinquent millionaire tax cases yielded $38 million in recoveries, which could be just the start, Werfel said in his briefing July 13.

“It just shows you how much money is out there in delinquent taxes because there are so many more cases for us to tackle,” he said on a call with reporters. “And so there’s just a significant opportunity there.”

A Treasury official said in June that House Republicans’ proposed $1.2 billion cut to IRS enforcement appropriations would result in a $8.6 billion revenue loss because the IRS would be hamstrung in its efforts to pursue wealthy individuals and businesses who are evading taxes.

The IRS comes across millions of taxpayers each year who file returns but still have additional taxes due. The agency ended fiscal 2022 with about 9.4 million taxpayer delinquent accounts in its inventory, according to the IRS fiscal 2022 data book. The data book doesn’t include a breakdown by income level, and the IRS didn’t immediately have information about the number of open high-income, high-balance cases.

For that reason, its emphasis on delinquent tax cases is on target, Caroline Ciraolo, a partner at Kostelanetz LLP, said by email.

“The IRS is correctly focused on these cases and the IRA resources should be used to hire and properly train collection personnel to identify high income and high wealth taxpayers to collect balances due,” Ciraolo said.

Corporations, Partnerships

The IRS also is planning to use tax-and-climate law funds to go after corporations and partnerships, and to hire data scientists to help improve audit selection. Werfel said July 13 that the agency would provide more details on enforcement efforts in a future briefing.

Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, said that compared to the wealthy individual-focused enforcement efforts the IRS touted, auditing partnerships requires more manpower because of their “very sophisticated arrangements.”

“It will take several years to get people hired and trained to really dig into those very sophisticated shelters,” Gleckman said.

Progressives praised the IRS efforts.

“Thanks to the Inflation Reduction Act, the IRS is taking new steps to ensure that rich tax cheats pay their fair share,” Sen. Elizabeth Warren (D-Mass.) said in a statement to Bloomberg Tax.

But conservatives aren’t convinced the IRS will focus only on the most clear-cut cases of wealthy individuals avoiding taxes.

Ryan Ellis, president of the Center for a Free Economy, said these latest cases represent only a small fraction of tax returns filed each year, and he’s concerned the agency will focus more on business owners who are successful but may have not had the most ideal recordkeeping because they didn’t have a full-time accountant on staff.

Use of the tax-and-climate law funds to audit these types of business owners “has always been my fear,” Ellis said.