IRS Says It Has Recovered $500 Million From Wealthy Taxpayers

The IRS is touting its recent enforcement efforts to collect millions from partnerships, large companies, and wealthy individuals to help close a giant tax gap, even as the agency stares down billions in expected cuts to its supplemental funding.

Over half a billion dollars has been recovered from millionaires with large tax debts since the start of Internal Revenue Service initiatives, the agency said Thursday. Last year, the IRS announced it would contact about 1,600 new millionaires about outstanding tax debt. Of these cases, the agency has collected $482 million from 900 millionaires, bringing the total collected to $520 million since early last year.

The IRS is taking “swift and aggressive” action to make sure high-income taxpayers pay what they owe, IRS Commissioner Danny Werfel said in a press call ahead of the public update. While Werfel said it’s too early to share what the collections mean for the tax gap—or the difference between taxes paid and owed—early indicators show that the scrutiny is having an “immediate impact.”

The new funds from the Democrats’ 2022 tax-and-climate law provided the chronically underfunded IRS $80 billion in multi-year supplemental funding to modernize its technology, improve taxpayer support, and enforce tax laws on companies and individuals not paying what they owe.

Lawmakers agreed on a timeline to reduce that funding by a quarter as part of last year’s debt limit deal, but recently agreed to speed up the clawbacks in a high-level agreement that could help to avert a government shutdown later this month. Under the recent deal, $20 billion of the funds would be clawed back in the fiscal 2024 spending bills, instead of what was agreed on in spreading out $10 billion in recissions over each of fiscal 2024 and 2025.

Werfel said the cut in supplemental funds won’t immediately impact the agency’s efforts.

Doubling Down

One big target of increased IRS scrutiny is partnerships, including those with over $10 million in assets with discrepancies on balance sheets between end-of-year balances compared to the beginning balances the following year. As of October, the IRS said it sent out 480 compliance alerts to these multimillion-dollar partnerships and opened exams on 76 of the largest partnerships that were selected in part with the help of artificial intelligence.

Hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms make up many of these large partnerships, with each having more than $10 billion in assets on average, according to the IRS.

A recent US Tax Court opinion in Soroban Capital Partners LP v. Commissioner is strengthening the IRS efforts to crack down on limited partners claiming to be exempt from self-employment taxes on their partnership-allocated earnings when they are active in the partnership, Werfel said. He didn’t comment on how a potential appeal in this case would affect IRS efforts, saying he didn’t want to get ahead of the legal proceedings.

To date, the IRS has more than 80 audits of wealthy individuals related to the Self-Employment Contributions Act taxes.

“As a result, partners who actively participated in the state law limited partnership must report their partnership share as net earnings from self-employment subject to SECA tax,” a Treasury Department press release said Friday.

The opinion “reinforces we are on the right track,” Werfel said.

US subsidiaries of foreign companies that don’t pay tax on the profit they make from US activity are also under the microscope. The IRS sent out an additional 30 compliance letters to companies encouraging self-correction, for a total of about 180 companies that received an alert since November. The IRS also previously announced it would expand the International Division’s Large Corporate Compliance program starting in early 2024, to audit 60 additional corporate taxpayers.

To ramp up these efforts, the IRS hired more than 560 new accountants in November and December, the press release said.

—With assistance from Chris Cioffi.