IRS Warns of New Strategy to Combat Tax Evasion
When the U.S. government passed the Inflation Reduction Act in 2022, it signaled big changes for the Internal Revenue Service (IRS), which was promised roughly $80 billion over the following 10 years. At first, it wasn’t clear exactly how the IRS would spend this money, but nearly a year later, it released its operations plan, which is designed to increase enforcement, while reducing tax evasion.
Further details have since been released, revealing a targeted plan to go after high earners and high net worth individuals and businesses. The agency plans to increase its technology capability and its capacity for audits, to investigate suspicious tax returns and catch those involved in tax evasion.
What will this mean for you, as a taxpayer? Are you now at risk of an IRS audit or further scrutiny? Let’s take a closer look at recent changes to the IRS’ funding and goals, including its new strategy to combat tax evasion.
The New Normal
When the IRS began to share its plans for the new government funding, it started with broad categories. Outside of a few small additions, the bulk of the money was expected to go toward four main areas:
- Taxpayer Services (includes taxpayer education, pre-filing assistance and more)
- Business Systems Modernization (includes updating technology to boost customer support)
- Operations Support (includes building and administrative costs, rent, maintenance, etc.)
- Enforcement (includes legal and litigation support, support for criminal investigations into tax evasion, investigative technology, digital asset monitoring support and more)
Since the summer of 2022, the IRS has laid out a more detailed roadmap, by providing details on its objectives. In an Operations Plan in 2023, the IRS highlighted a series of goals, including:
- Attract and retain a skilled workforce
- Improve taxpayer services
- Implement leading-edge technology and analytics
- Expand enforcement, especially on taxpayers with complex tax filings and recognized non-compliance
In short, the IRS is using the money promised in the Inflation Reduction Act to build its depth, capacity and reach. While it promises to help taxpayers through improved services, it is also planning to recoup funds by expanding enforcement, going directly after those who are suspected of tax evasion.
Of course, some of these objectives work hand in hand with one another. The IRS will almost certainly use improved data and analytics to spot suspicious tax returns, allowing them to catch more non-filers and noncompliant returns while searching for broad patterns that indicate tax evasion.
Recently, the IRS has unveiled even more detail on its plans for enforcement. The big picture? The agency plans to crack down on high-net-income earners and high-net-worth taxpayers, where it suspects tax evasion or non-compliance. Let’s take a closer look.
A Tight Focus on Specific Groups
In a recent announcement, the IRS revealed that it will proactively go after those who engage in tax evasion — those who purposely fail to file their taxes or artificially reduce their taxes owing. Specifically, it will spotlight high earners, high net income individuals, and taxpayers with complex issues or returns, to examine their taxes paid.
If your household earns more than $400,000 annually or your mid-large size business has complex tax issues, you will likely be at higher risk for an audit. The IRS is prepared to go after both individuals and businesses, for everything from simple, but suspicious tax errors to complex tax evasion strategies.
Why the increased audit pressure on a specific segment of the population? Make no mistake, the IRS is keen to recoup the money it determines it has been missing out on for some time. Historically, IRS audits have produced significant income for the federal government, but with budget cuts over time, the agency has struggled to keep up with the technology and staff required to conduct audits consistently.
The IRS claims that without the capacity, audit rates have declined “to levels that erode voluntary compliance”. In other words, with less fear of an audit, taxpayers have been less diligent in complying with tax regulations and more likely to engage in tax evasion.
All this, it seems, is about to change. As the IRS prepares to double-down on those who have knowingly skipped out on the taxes they owe, everyone in higher income groups or with complex taxes is at greater risk of being singled out for an IRS audit.
The Stress is Real
For most taxpayers, the idea of a tax audit is stressful. Even if you are not involved in tax evasion and have done nothing wrong, the process and intrusion of an IRS tax audit can be daunting.
Based on your income or tax situation alone, the new IRS strategy may land you directly in their crosshairs. Many taxpayers will feel unfairly targeted, as if they’ve done something wrong when they’ve only worked to minimize their taxes.
You may second-guess every write-off or deduction you’ve made on your taxes over the last number of years. You may worry that the IRS is waiting to dive into your personal finances or business records.
It’s important to keep in mind that while tax evasion is illegal, minimizing your taxes is perfectly legal. If you’ve used reliable professionals to do your taxes, chances are good that you will be organized and ready. Even if you are selected for an IRS audit, you’ll quickly have the information they request ready for review.
What to Do About It
Given this new strategy announced by the IRS, how can you best prepare yourself? First, try not to panic. Even if you are in one of the targeted groups for this new approach, you will survive an IRS audit.
First things first, get your tax returns organized. Generally, an IRS audit will review returns filed within the last three years. Start here, ensuring you have copies of your returns and receipts for the last three years. If the IRS finds significant errors or gaps in reporting in this initial exercise, they may ask to see returns from additional years. If you want to be fully prepared, in case they ask to see more, make sure you have your tax returns from the last six years. Only in rare cases will an IRS audit ask to see more.
It helps to stay up-to-date with news from the IRS, as well. Given the recent changes in funding to the agency, there will be plenty of details that continue to unfold. Updates to IRS policies and strategies can directly impact you or your business.
The Right Support
While the effort to stay ahead of IRS tactics may seem overwhelming, keep in mind that you don’t have to do it alone. Working with an experienced team of tax experts will help you feel prepared. The right team of professionals will be up-to-speed with the latest tax laws and IRS strategies.
Rather than worry that the IRS will target you or your business in an audit, find a team of tax experts who can put your mind at ease. You’re not likely involved in a tax evasion scheme — the right tax team can help you minimize taxes while staying well within current tax laws.
At Franskoviak Tax Solutions, we have helped thousands of clients with taxes and tax problems for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, IRS tax deadlines, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you file your taxes and work through common tax problems.