The IRS is going after the wealthy as promised by the President. The Internal Revenue Service reported [in January] on its efforts to increase its audits of large corporations, complex partnerships, and high-income individuals, collecting over half a billion dollars from millionaires who failed to pay their taxes.
According to IRS Commissioner Danny Werfel, a Biden appointee, the IRS is now going after millionaires who have not paid hundreds of millions of dollars in tax debt, with an additional $360 million collected from millionaires as of October 31, 2023.
The agency has now collected $482 million in its ongoing effort to recoup taxes owed by 1,600 millionaires. When combined with earlier efforts, the IRS said it has recovered over half a billion dollars from delinquent millionaires. It has also advanced efforts to pursue people using partnerships to avoid paying self-employment taxes along with other enforcement priorities announced in the fall of 2023.
Werfel went on to state that on the compliance side, as part of the IRS increased pursuit of the wealthy, the IRS is continuing to increase scrutiny on high-income taxpayers and high-wealth individuals.
Werfel also stated that the new IRS approach will be that “If you are low- or middle-income or any income category, you will see improved service, “If you are wealthy, there will be increased scrutiny.”
He noted that the IRS is making progress in pursuing noncompliance among people using partnerships to avoid paying self-employment taxes, stating that this program” is aimed at partners who try to evade self-employment tax by using an exemption that applies specifically to limited partners, even though they do not qualify as such.”
Werfel said the IRS has been aided by a recent U.S. Tax Court opinion backing the IRS position that the limited partner exception does not apply to a partner who is limited in name only. 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 Self-Employed Contributions Act taxes.
Commissioner Werfel further stated that “Cracking down on these high-wealth tax evaders is especially important because self-employment taxes help fund Social Security and Medicare”. He went on to state that “The average worker has these taxes automatically taken out of their paycheck, but people who are self-employed are supposed to pay these taxes when they file their federal return.”
Partnership Audits
The IRS is also increasing their audits of large partnerships to further understand the complex tax structures and tax issues they present with the help of advanced technology.
As of December, the IRS has opened audits of 76 of the largest U.S. partnerships. Werfel stated that “They represent a cross-section of industries that include hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries.”
The IRS has sent 480 compliance notices to taxpayers where it found obvious discrepancies.
High Income Taxpayers are Now the Preferred Audit Targets
High-income individuals are now the major target of the IRS’s compliance efforts. According to Commissioner Werfel, he has assigned revenue officers focused on these high-end taxpayers.
But is this the real problem?
The focus of the current administration is aimed at the wealthy, and it is certain that there are bad players at every level of the taxpaying public, and those who are cheating should be found out and prosecuted, IRS data shows that the largest amount of tax fraud is committed by the lower income taxpayers.
As of the last information available, well over $20 billion annually in fraudulent tax credit claims are made by the lowest income households, yet the IRS is doing little to nothing in preventing this incredible hemorrhage of tax dollars paid out yearly.
More than 53 million low- and middle-income taxpayers pay no income taxes after benefiting from record amounts of tax credits, and six out of 10 households receive more in direct government benefits than they pay in all federal taxes.
Meanwhile, the U.S. tax system is “business and wealthy dependent” with American businesses and high net worth taxpayers paying or remitting over 93 percent of the nation’s taxes.
It would appear that it is politically more expedient to chase those who are already paying the bulk of taxes in America rather than shoring up the incredible annual hemorrhage of fraudulently paid out tax credits with no enforcement made in that arena.
Peter Muffoletto is with Peter Muffoletto & Company and may be reached at
(818) 346-2160, or you can visit us on the web at www.petemcpa.com.