The IRS will continue its pursuit of money owed to the U.S. government by sending letters to about 150 U.S. subsidiaries of foreign corporations, reminding them of their tax obligations; initiating audits of 60 large corporations; and proceeding with its investigations of high-wealth individuals who do not pay their taxes, IRS Commissioner Danny Werfel said Thursday.
The second quarterly update, which included discussions of taxpayer service and technology, came as Werfel continues to make his case that the IRS is using its Inflation Reduction Act funding judiciously.
“We know that implementing such an ambitious plan is challenging,” he said. “We understand that our challenges are made even more stark by ongoing budget uncertainty.”
Under the Inflation Reduction Act of 2022, P.L. 117-169, the IRS was allocated $80 billion over 10 years, but that figure was cut to $60 billion during negotiations over the debt ceiling. The IRS and Treasury are pushing to keep the annual appropriations and not let the Inflation Reduction Act monies substitute for that line item.
Both in Werfel’s comments and in a news release, the IRS focused on tax enforcement efforts related to wealthy corporations and individuals. Compliance makes for a fairer tax system, Werfel said, adding that it helps close the tax gap, which the IRS projected earlier this week had grown to $688 billion in 2022, up from $601 billion in 2021.
Taxpayers getting the IRS’s attention now are:
U.S. subsidiaries of large foreign companies that distribute goods in the U.S. and do not pay their fair share of tax on profit from that activity: Starting next month, the IRS will send compliance alerts to about 150 U.S. subsidiaries “to remind them of their U.S. tax obligations and to incentivize taxpayer self-correction,” Werfel said.
Large corporate taxpayers with average assets over $24 billion and average taxable income of $526 million per year: Some 60 corporations will be targeted for audit beginning early in 2024, Werfel said, as the IRS expands its large business and international division (LB&I), which will hire new accountants. In September, the IRS said it hoped to hire 3,700 experienced auditors.
Companies that filed amended returns totaling $6 billion to claim the former Sec. 199 domestic production activities deduction when it was repealed in 2017: “Shortly after the repeal, the IRS received a wave of questionable amended returns and claims for tax benefits in the billions of dollars with a significant portion of the filers taking the deduction for the first time,” Werfel said. “In response, the IRS launched a campaign to address noncompliance and review these high-risk claims.”
One sign of success in this area: The Tenth Circuit upheld a Tax Court decision to deny a claim based on a $1.8 billion Sec. 199 deduction, Werfel said (Bats Global Market Holdings, Inc., No. 22-9002 (10th Cir. 7/12/23), aff’g 158 T.C. No. 5 (2022)).
High-income, high-wealth people who either do not file tax returns or do not pay taxes due on time: Werfel previously said that the IRS was focused on 1,600 taxpayers with over $1 million in income and $250,000 in recognized tax debt. So far, the IRS has collected $122 million in 100 of those cases, he said. Earlier efforts resulted in the collection of $38 million from over 175 high-income earners, bringing the total amount of additional taxes paid by the wealth to $160 million, he said.
Werfel also discussed the launch of online business tax accounts; improvements to several types of online accounts, including those for tax professionals; and technology upgrades, including an increase in document scanning.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.