The IRS is hiring hundreds of new auditors as it gears up
for a potentially massive tax-enforcement push after President Biden proposed
increasing the agency’s budget for enforcement by $80 billion over 10 years.
The IRS has already announced plans to hire some 2,000
workers before the end of September as part of an effort to replace the more
than 17,000 audit staff lost since 2010, said Diane Compardo, partner at Moneta
in St. Louis. “Some 1,300 of the new hires are expected to be revenue agents
and up to 500 will be in the IRS Criminal Investigation unit. To put this in
context, the IRS has hired fewer than 350 criminal investigation employees
since 2014.”
The IRS would also require financial institutions to provide
information about account inflows and outflows, including for loans and
investments and cryptocurrency.
“The changes to information reporting alone is projected to
raise $460 billion over the next decade,” said Brent Lipschultz, partner in the
New York office of EisnerAmper LLP. “Overhauling outdated technology will,
according to the government, help identify tax evasion by wealthy clients.”
“If I were very wealthy and had any doubts about the
correctness of all of my tax returns and behavior, I would be terrified in
today’s climate,” said Morris Armstrong, an RIA at Armstrong Financial
Strategies in Cheshire, Conn. “Right now, the IRS can go after a million tax
cheats and collect X. With the added budget, they can go after 10,000 and
collect an equal amount but that will involve more litigation, research and
risk. Obviously, when you have substantial wealth, you’re more likely using
more sophisticated [tax and investment] vehicles that must be examined, and
that takes time and manpower.”
A recent report from the Treasury inspector general for tax
administration said that the IRS has failed to bring in as much tax revenue as
possible from wealthy taxpayers in the last few years. Robert Karon, CPA and
J.D., Minneapolis-based managing director at CBIZ MHM, said that this “tax gap”
has almost doubled in the past decade from about $380 billion annually to about
$700 billion or more today.
Pressure on richer taxpayers is already evident against
those who have tried such tax tactics as conservation easements to claim large
charitable deductions over the past decade, said Compardo, who added that she
does not recommend using such easements. “Many wealthy taxpayers used them
aggressively to offset taxable income. The IRS is taking a very tough position
against those taxpayers today and currently refusing to budge or negotiate.
We’ll see more of this in other areas, including income, estate and gift tax
audits,” she said.
Lipschultz recommends clients maintain records through the
entire statute of limitations period (usually at least about three years),
adding that his firm sometimes puts clients through mock audits to make sure
they have the proper documentation to get through the real thing.
This enforcement remains far from reality. “It’ll take a
number of years, maybe several, for higher audit rates to come out and for the
IRS to train competent people and new auditors to do this,” Karon said. “The
IRS has about a third or more of their workforce eligible to retire in the next
five years. This does not include the people who leave early for other jobs.
These people must be replaced, in addition to the new people the IRS would need
to hire and train.”
“We’re potentially on the cusp of major, some may even say
drastic, changes to our income and estate tax system,” Compardo said. “But
everything being discussed right now is merely a possibility.”
“Legislative negotiations to boost IRS enforcement activity
seemed to have become more contentious ... so how the IRS will pay for the new
auditors is questionable if legislation supporting increased enforcement
doesn’t end up happening,” said David Shuster, a principal and international
tax/director of tax controversy services in the New York offices of Friedman
LLP.
“Just know that the chances of having to defend a return,
and the accompanying time and expense, could become greater,” he added.
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