IRS Continues Ramping Up Tax Enforcement for Millionaires

The IRS has allocated more of its resources provided by the Inflation Reduction Act (IRA) to tax enforcement, and tax-evading millionaires and billionaires continue to be targets. The agency recently collected taxes from 1,600 millionaires, resulting in a total of $520 million recovered for the U.S. government since implementing the new initiatives. And the IRS is nowhere near done making the wealthy pay their share.

"We are adding staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law," said IRS Commissioner, Danny Werfel.

Tax enforcement for millionaires and partnerships

Any taxpayer can face an IRS audit, but the IRS has its sights set on complex partnerships and wealthy taxpayers who refuse to pay up (or falsify their tax returns), such as millionaires and billionaires buying Bentleys (as happened in a case cited by the agency) instead of paying their tax bills. And now that the agency has the resources to better identify wealthy tax evaders, millionaires that “bend the tax rules” should beware.

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Millionaire tax 'loopholes’

With its funding, the IRS has been digging into some common scenarios some wealthy taxpayers use to evade big tax bills, which include (but are not limited to) the following: 

• A taxpayer claiming residence in Puerto Rico (without actually having real residency there).
• A taxpayer claiming exemptions based on treaty rules between the U.S. and Malta.
• A taxpayer failing to file tax returns but making luxury purchases (such as Bentleys and other luxury cars).
• Taxpayers who illegally move assets into offshore accounts, including Malta personal retirement scheme transactions, to hide taxable income.

The IRS is also taking additional "swift and aggressive action" by expanding and improving several of its programs as part of ongoing efforts to close the tax gap. For example, the agency utilized machine learning technology to open examinations on 76 of the largest partnerships in the U.S. and is increasing enforcement efforts for taxpayers who incorrectly claim to qualify "limited partners" in limited partnerships not subject to self-employment tax.

Chances of an IRS audit 

IRS audits of wealthy taxpayers dropped in recent years, according to a report from the U.S. Government Accountability Office (GAO). But the IRS attributed this drop to a lack of resources. That’s partly because conducting audits of wealthy taxpayers’ tax returns requires more time and agents than auditing “every day” tax returns.  (The IRS has recently come under fire for auditing some taxpayers more than others.)

Now that the IRS has more staff and is implementing AI to identify possible tax evasion, wealthy taxpayers’ chances of an audit could increase this year. 

And while the IRS is focusing enforcement on the wealthy, complex partnerships and corporations, non-millionaire taxpayers are still subject to audits. Taxpayers can reduce audit risk by avoiding common IRS red flags, such as failing to report income and claiming excessive tax write-offs on Schedule C. 

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