The Internal Revenue Service (IRS) has unveiled its plan to target high-income earners, partnerships, large corporations, and promoters who have historically exploited tax laws in the United States.

This initiative, announced on Friday, September 8, comes after a review of enforcement practices and is made possible through funding from the Inflation Reduction Act (IRA).

The focus of the effort is to address the decline in audit rates for high-income earners, partnerships, and other segments over the past decade. Utilising advanced technology and artificial intelligence (AI), the IRS aims to detect tax evasion, identify emerging compliance threats, and enhance case selection methods, ultimately reducing unnecessary “no-change” audits.

Targeting high-income earners

The IRS will intensify efforts to audit taxpayers with total positive income exceeding US$1 million and recognized tax debt exceeding US$250,000. This initiative builds on previous successes, where more than 175 high-income earners paid a total of US$38 million in taxes.

Large Partnership Compliance (LPC) programme expansion

The IRS launched the LPC programme in 2021 to examine complex partnership returns. It will now expand the programme to additional large partnerships. AI will play a crucial role in selecting these returns, identifying potential compliance risks, and covering various industries, including hedge funds, real estate investment partnerships, and more.

Addressing partnership balance sheet discrepancies

Discrepancies on balance sheets involving partnerships with over US$10 million in assets have been identified as potential non-compliance indicators. The IRS will engage with such partnerships to address these discrepancies, starting with approximately 500 partnerships in October.

Targeting other tax evasion schemes

The IRS will also increase scrutiny on digital assets, investigate Foreign Bank Account Reporting (FBAR) violations, and address issues such as labor brokers using “shell” companies to evade taxes.

Protecting taxpayers from scams and schemes

The IRS will improve audit fairness for those claiming the Earned Income Tax Credit (EITC), raise awareness about emerging scams, and continue its efforts to protect against tax-related identity theft.

Danny Werfel, IRS commissioner, emphasised the importance of this initiative in ensuring tax fairness and bolstering the nation’s tax system. He said, “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.”

The allocation of US$80 billion through the Inflation Reduction Act has sparked political debates, with Republicans expressing concerns about the potential harassment of small businesses and middle-class taxpayers. However, Democrats and the Biden administration are keen to demonstrate that the funding primarily targets high-income individuals and corporations engaged in tax evasion.

The use of AI in IRS enforcement has drawn criticism from some quarters who argue that it raises concerns about the security and privacy of taxpayer data. Nonetheless, the IRS asserts that AI will improve its ability to identify complex tax evasion schemes and reduce unnecessary audits.