Earlier this month, the IRS has announced the new targets for their examination efforts. This information is in line with the previous discussion to target wealthy individuals over the $400,000 income threshold that was mentioned by President Joe Biden in the 2022 State of the Union speech, Treasury Secretary Janet Yellen who instructed the IRS in a letter and other political nominees.
From the IRS post, it states that ” … As part of the effort, the IRS will also ensure audit rates do not increase for those earning less than $400,000 a year as well as adding new fairness safeguards for those claiming the Earned Income Tax Credit.”
Additionally, it mentions “… the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024. The IRS is working to expand this effort, contacting about 1,600 taxpayers in this category that owe hundreds of millions of dollars in taxes.”
Regarding partnership, it seems that some large partnership had significant differences between ending prior year and beginning current year balances, which might generate basis discrepancies. It is detailed in the same post “… The IRS has identified ongoing discrepancies on balance sheets involving partnerships with over $10 million in assets, which is an indicator of potential non-compliance. Taxpayers filing partnership returns are showing discrepancies in the millions of dollars between end-of-year balances compared to the beginning balances the following year. The number of such discrepancies has been increasing over the years.”
Finally, it makes reference to keep “… warning consumers about emerging scams and schemes. Building off efforts like the Dirty Dozen, the IRS plans to warn taxpayers about quickly emerging scams.”
We think the IRS is moving on the right direction, especially trying to tackle scams, which resulted in the ERC moratorium recently (as discussed on a previous post). However, we should not forget that even if targeted high-income earners generated tax collections of $38 millions, but there is fraud of around $20 billion annually on the Earned Income Credit per IRS reports.
“… With respect to the EITC, the improper payment rate reported by the Department of the Treasury for Fiscal Year 2019 was 25.3%, totaling $17.4 billion.” obtained from the IRS post Maximizing the Earned Income Tax Credit
Or how the unemployment fraud might have been over $60 billion during the pandemic based on U.S. Government Accountability Office’s findings – “… We estimate that, during the pandemic, total fraud in these programs was over $60 billion and perhaps much higher.” According to other data, the number might be much higher as the Department of Labor estimated the error to be around $168 billions or to be up to 21% of the funds provided.
Based on these reports of billions of dollars lost due to fraud, we consider that addressing these issues might be more relevant than targeting high income individuals (be penny wise, dollar fool).
IRS Post – IRS announces sweeping effort to restore fairness to tax system with Inflation Reduction Act funding; new compliance efforts focused on increasing scrutiny on high-income, partnerships, corporations and promoters abusing tax rules on the books