President Joe Biden has proposed increasing the IRS’s funding by 70% in order to chase down tax avoiders and evaders. If the proposal were passed, it would be aimed at wealthier taxpayers and corporations, as they are thought to commit the most tax misconduct. If you fall into one of those categories, you may be wondering if you will be at additional risk of an audit or other enforcement action.
Who is most at risk?
According to Accounting Today, the most likely targets for additional tax enforcement are taxpayers who file earnings that aren’t reported separately to the IRS by outside sources. This is because tax compliance rates hover around 90% when there is a third-party report of income but drops to around 50% when there is not.
That said, there are a number of taxpayers who have already been receiving increased scrutiny, and that’s not likely to change.
Here are what are likely some enforcement targets:
Wealthy non-filers
The IRS already had plans in the works to subject wealthy non-filers to in-person audits. However, these plans, targeted at non-filers earning over $100,000 per year, were put on hold due to the pandemic. These non-filers are likely to remain at the top of the IRS’s list.
Offshore account holders
In 2010, the Foreign Account Tax Compliance Act increased reporting of offshore accounts by banks. However, the GAO recently found that the IRS lacked the resources to match those reports with the correct taxpayer. Additional IRS resources would change that.
Owners of pass-through entities
Accounting Today found that the largest source of the tax gap comes from owners of pass-through entities underreporting their income. Underreporting can be mistaken or intentional, but it is hard to police because there is no third-party mechanism for verifying it. Biden has proposed requiring banks to report all deposit and withdrawal activity to the IRS by people with over $25,000 in receipts. This would be a huge undertaking and would face considerable pushback in Congress, but if passed it would create that third-party verification.
Cryptocurrency investors
Another type of income that lacks a third-party verification mechanism is electronic currency, which is taxed at the capital gains rate. The IRS already has a team in place that is dedicated to finding unreported cryptocurrency gains: Operation Hidden Treasure. However, lawmakers might put new rules in place to standardize reporting, especially for transactions above a certain threshold.
Estates
Although the estate tax threshold hasn’t risen, the IRS might begin focusing on ensuring that estates are valued correctly so they can be taxed correctly.
Are your taxes in order? If you could be targeted by additional IRS enforcement activity, don’t take chances. Talk to a tax attorney about your situation.