The Internal Revenue Service announced four new initiatives on Friday aimed at ensuring that high-income, high-wealth individuals and large corporations pay the taxes that are “owed” to the agency.
One initiative targets American subsidiaries of foreign companies that distribute goods in the United States, but “do not pay their fair share of tax on the profit they earn” from their U.S. operations, the agency said in an Oct. 20 press release. The IRS is increasing its compliance efforts on such firms. “These foreign companies report losses or exceedingly low margins year after year through the improper use of transfer pricing to avoid reporting an appropriate amount of U.S. profits.”
Transfer price refers to the price charged for goods and services exchanged between multiple divisions of the same company. Firms make use of this tactic to reduce the tax burden of the parent firm.
The IRS aims to “crack down on this strategy” and is sending compliance alerts to around 150 subsidiaries of large foreign corporations to “reiterate” their tax obligations in America.
The second initiative is related to the IRS Large Business & International Division’s (LB&I) Large Corporate Compliance (LCC) which is being expanded.
LCC deals with the “largest and most complex corporate taxpayers.” Such establishments have assets worth over $24 billion on average, with their annual taxable income averaging approximately $526 million. LB&I will be auditing an additional 60 of such big corporations.
The third initiative involves cracking down on the abuse of a corporate tax break that was repealed in 2017. The provision offered tax deductions for companies producing goods in the United States.
After the tax break was repealed, the IRS received “hundreds of claims collectively seeking more than $6 billion in refunds” from companies. The agency is reviewing high-risk claims. A court recently sided with the IRS to deny a refund claim worth $1.8 billion.
The fourth initiative targets individual taxpayers. The IRS said it was prioritizing pursuing “high-income, high-wealth individuals who have either not filed their taxes or failed to pay recognized tax debt.”
Such taxpayers are those making over $1 million in annual income and have more than $250,000 in recognized tax debts.
The agency had earlier collected $38 million from more than 175 high-income earners. In September, the IRS announced going after 1,600 new taxpayers from this category. It has so far collected $122 million from 100 such cases, according to the release.
The IRS credited the new initiatives on the funding received from the Inflation Reduction Act passed last year.
The IRS’s increased compliance efforts targeting high-income, high-wealth individuals comes as the agency has been criticized by watchdog Treasury Inspector General for Tax Administration (TIGTA) for lacking a clear definition of “high-income” earners.
“The high-income terminology is being used loosely inside the IRS with no common understanding of what the term means,” the TIGTA said in a report. The IRS relies on the decades-old definition of high income, which classifies anything above $200,000 in income as high.
Improved Taxpayer Services
In its Oct. 20 press release, the IRS also announced several measures to improve taxpayer services. The agency will arrange for community assistance visits where it will set up temporary Taxpayer Assistance Centers in hard-to-reach areas.It has opened or reopened 50 Taxpayer Assistance Centers since the Inflation Reduction Act was passed. As of Sept. 23, 745 employees have been hired at these centers, registering a 31 percent net increase in staffing compared to fiscal 2022.
Taxpayers now have the choice to respond to tax notices online. Until filing season 2023, such responses had to be made through traditional mail.
The IRS is also facilitating taxpayers to submit mobile-friendly forms, with three forms already being released: Form 15109—Request for Tax Deferment, Form 14039—Identity Theft Affidavit, and Form 14242—Reporting Abusive Tax Promotions and/or Preparers.
A fourth form, Form 13909—Tax-Exempt Organization Complaint, will be launched later this fall. By early 2024, the IRS calculates it would launch mobile-friendly versions of “at least 20 of the most-used tax forms.”
IRS’ Compliance and Enforcement Efforts
The IRS’s new initiatives come after the agency said last week that the tax gap—the difference between what is owed and paid to the government—widened to $688 billion in 2021.At the time, IRS Commissioner Danny Werfel said that the agency was “adding focus and resources to areas of compliance concern, including high-income and high-wealth individuals, partnerships, and corporations.”
“These steps are urgent in many ways, including adding more fairness to the tax system, protecting those who pay their taxes, and working to combat the tax gap.”
Last month, the IRS announced over 3,700 employee positions available for tax enforcement work focusing on high-income earners, complex partnerships, and large corporations spread. The positions were open at over 250 locations nationwide.
The agents were to be hired for “specialized technical positions that generally focus on audits,” the agency said. The 3,700 employees are expected to cost the American taxpayer nearly $650 million in the first year.
