Things to watch for at the IRS

Armed with a budget increase of $80 billion and anticipating hiring another 87,000 revenue agents over the next few years, the IRS is poised to increase enforcement efforts and enhance taxpayer data safety. As we had discussed in last year’s annual tax letter, wealthier taxpayers can certainly continue to expect increased audit activity, especially with respect to large partnerships and other pass-through entities. Other areas where increased IRS activity is projected include tax return scanning technology, taxpayer identity protection, data security, issue enforcement and tax-scam protection.

Tax return scanning technology

Similar to the barcodes scanned in most retail establishments for purchasing purposes, the IRS is considering implementing a similar technology in processing income tax returns. In an effort to overcome the enormous backlog of unprocessed paper returns (8.7 million as of August 2022), the National Taxpayer Advocate (NTA) is pushing the IRS to adopt barcode scanning of paper-filed returns. The NTA is also encouraging the IRS to work with tax software providers to develop and voluntarily implement a 2-D barcode on returns prepared with its products. In addition, the IRS is being asked to upgrade internal systems in order to accommodate barcode scanning, optical character recognition and machine-readable text. Currently, the IRS is piloting different technologies but will not commit to specifics or timing. The IRS continues to make more forms available for electronic filing and encourages taxpayers to e-file their returns instead of paper filing.

Taxpayer identity protection

Taxpayers wanting to proactively protect themselves and their Social Security numbers (SSNs) from identity theft can apply for an identity protection (IP) PIN. This is a six-digit number designed to prevent a person from using an SSN or individual taxpayer identification number (ITIN) that does not belong to them. The IP PIN is an identifying number known only to the specific taxpayer and the IRS. Taxpayers who are known victims of identity theft are automatically assigned an IP PIN.

IP PINs are valid for one year and are automatically generated each subsequent year. Once obtained, it must be used when filing Form 1040 (as well as Forms 1040-NR, 1040-PR and 1040-SS) during the tax year (including prior-year returns). If lost, the IRS has a system in place to recover or reassign the IP PIN. Spouses and dependents can also obtain an IP PIN.

Requesting an IP PIN by validating a taxpayer’s identity can be done in three ways: