How the IRS is changing tax enforcement

The Internal Revenue Service (IRS) tax enforcement continues to increase using targeted audit approaches. The IRS will deploy resources towards examinations of high-income and high-net wealth individuals, large corporations and complex partnerships. In addition, the agency plans to acquire improved technology, automation and other tools aimed at greater efficiency, and continues to apply data analytics in operational management and selection of compliance cases.

This article describes some of the more notable changes to tax enforcement by the IRS during the last year as outlined in their Strategic Operating Plan.

Use of IRA funding

The IRS is in the early stages of deploying some of the $80 billion allocated to the agency by the Inflation Reduction Act (IRA). While it is unlikely that the agency will receive the full amount of the IRA funding, even receiving a significant percentage of that amount would materially change how the agency is able to employ technology, recruit more experienced agents, and proactively target areas of perceived tax noncompliance. It is expected that some of the agency funding will also allow the agency to better process correspondence and reduce response times to basic inquires.

Some of the early efforts of the funding have become evident in the field. Certain collection alternative requests, such as offer in compromises, are being processed in weeks as opposed to months and many field agents have completed comprehensive trainings at higher levels prior to being assigned technical topics.

CPAR rollout

The IRS has significantly increased the number of partnership audits under the Bipartisan Budget Act of 2015 (BBA) centralized partnership audit regime (CPAR). The CPAR audit regime shifts significant burdens to taxpayers instead of the IRS. If the IRS determines that there was an understatement of a partnership tax item at the entity level, the agency does not need to make a corresponding assessment on the partner’s individual return. Instead the IRS is allowed to assess an underpayment at the entity level calculated using the maximum individual rate. It then becomes the responsibility of the partnership to substantiate a lower applicable rate and decide whether the entity should pay the tax or if it should push out the adjustment to the individual partners.