The IRS has collected about $160 million this year from its crackdown on wealthy taxpayers but isn't done going after millionaire tax evaders. With increased funding from the Inflation Reduction Act, the IRS can better identify wealthy taxpayers and corporations that owe back taxes. The project, described by the agency as a “sweeping, historic effort” to collect taxes owed, began this fall.
“We will increase our compliance efforts on those posing the greatest risk to our nation's tax system, whether it's the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes. These steps are critical for the future of the nation's tax system," said IRS Commissioner Danny Werfel in a release.
Roughly 1,600 millionaires and 575 business partnerships are on the IRS’ focus list for these expanded collection efforts. Here’s what you need to know.
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IRS targets millionaire tax evaders
Kiplinger previously reported about the IRS’ broad efforts to ramp up tax enforcement for millionaires, but the agency has narrowed its sights to 1,600 taxpayers with incomes over $1 million. The agency is focusing first on millionaires with at least $250,000 in recognized tax debt. The IRS says that successful enforcement in those cases could result in hundreds of millions of dollars in tax revenue.
Are you off the hook if you have less tax debt? You might not be on the IRS’ list of 1,600 millionaires if you have less than $250,000 in tax debt. But that doesn’t mean you’re off the hook from a tax enforcement perspective. That’s because the IRS is also looking into wealthy taxpayers who “cut corners” or set off audit red flags. For example:
- The IRS has identified hundreds of possible taxpayers who don’t file a Report of Foreign Bank and Financial Accounts (FBAR). These taxpayers are estimated to have account balances that average over $1.4 million.
- The agency has taken notice of contractors claiming to make Form 1099-MISC/1099-NEC payments to subcontractors that appear to be “shell” companies.
- The IRS is also looking closely at taxpayers who make certain types of purchases when their reported income doesn't support the ability to afford these expenses.
The above is not an exhaustive list of possible red flags on the agency’s radar. The IRS says it will provide additional details regarding broader tax compliance efforts in the near future.
$160 million from high earners so far
In the meantime, Commissioner Werfel recently told reporters that enforcement efforts focused on wealthier taxpayers have already yielded results.
- For example, in one case a taxpayer had to pay over $15 million in restitution. The multimillions reportedly stemmed from false business deduction claims, including a claim for a 51,000-square-foot mansion that was a personal expense.
- In another case, a taxpayer who allegedly skimmed over $670,000 from their business, pleaded guilty to filing false returns involving more than $100,000 reportedly spent on personal expenses and more than half a million dollars on gambling.
The agency said it collected $122 million from about 100 taxpayers of the 1600 targeted for enforcement. When added to the $38 million the IRS collected earlier in the year, the agency touts around $160 million in recovered taxes from wealtheir taxpayers this year.
IRS partnership audits
The IRS will also focus compliance efforts on 575 partnerships. This includes 75 of the largest U.S. business partnerships that average $10 billion in assets. (The IRS says it plans to open examinations of those businesses.)
Additionally, the agency plans to contact roughly 500 other partnerships that have had discrepancies in their balance sheets. Many of these partnerships:
- Failed to include documentation with their partnership returns explaining the discrepancies.
- Have over $10 million in assets, which indicates possible non-compliance, according to the IRS.
The IRS plans to add these partnerships to the “audit stream for additional work,” depending on the response the agency receives from the mailings.
What are the penalties for tax evasion?
Given the IRS’ focus on tax evaders, it’s important to remember what tax evasion is and what the penalties can be. Tax evasion includes “the failure to pay or a deliberate underpayment of taxes.” And it is a serious crime that could result in hefty fines and possible imprisonment.
- Tax evaders can face a fine up to $100,000 ($500,000 for corporations).
- An attempt to evade taxes may result in up to five years of imprisonment.
However, specific legal consequences and tax penalties for failing to pay back taxes (or falsifying income and deductions) depend on the facts and circumstances of each case. Millionaires, and other earners, concerned about becoming a focus of the IRS's compliance efforts should consult with a tax professional, such as a tax attorney.
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