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New IRS Unit Targets Tax Compliance for High-Income Individuals and Pass-Through Entities

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    The Internal Revenue Service (IRS) seeks to put an end to all forms of tax evasion schemes, regardless of their size or complexity. However, as of 2023, a heightened focus has been placed on high-income earners and pass-through entities. Pass-through entities are business structures where income is not taxed at the entity level but is instead passed through to the owners and taxed at their individual tax rates.

    For instance, in September of 2023, the IRS announced plans to establish a dedicated unit to address compliance issues among these classes of taxpayers. This specialized unit, integrated into the IRS Large Business and International Division (LBI), will focus on ensuring that wealthy taxpayers fulfill their tax obligations, especially in areas related to partnerships and large corporations. Thankfully, the experienced team at our firm can ensure that our clients remain in compliance with evolving tax laws.

    Seek support and guidance from our Dual-Licensed Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

    Overview of the New IRS Unit

    As previously discussed, the IRS announced in 2023 that the agency was adding a specialized division dedicated to addressing compliance issues among high-income individuals and complex pass-through entities. This new unit will be integrated into the LBI division and incorporate individuals recruited through a recent IRS hiring initiative. The initiative, part of a broader transformation effort within the IRS, aims to fill over 3,700 nationwide positions to enhance enforcement activities, particularly in areas concerning complex partnerships, large corporations, and individuals with substantial incomes and wealth.

    IRS Commissioner Danny Werfel emphasized the agency’s commitment to ensuring that the wealthiest taxpayers fully fulfill their tax obligations. The IRS seeks to focus on areas where non-compliance among high-income individuals has become more prevalent. Pass-through entities, such as partnerships and S-corporations, are a key concern. These entities pass their income through to individual or corporate owners and are taxed at their respective income tax rates. Higher-income groups often utilize pass-through structures and involve intricate tax arrangements.

    The IRS is establishing a dedicated pass-through work group within the LBI division to address these issues. LBI Commissioner Holly Paz announced this development and stressed the importance of a smooth transition as the new group begins its operations. The IRS will also collaborate with the National Treasury Employees Union (NTEU) on this effort. While the formal launch of the workgroup is anticipated to occur late next year, efforts to tackle pass-through-related compliance issues will intensify in the interim. The workgroup will include employees from both LBI and the Small Business/Self-Employed Division, offering expanded opportunities for professional development.

    This initiative is part of a broader compliance campaign aimed at rectifying the decline in audit rates among high-income individuals, partnerships, and large corporations over the past decade. Leveraging improved technology and Artificial Intelligence, the IRS intends to enhance its ability to detect tax evasion, identify emerging compliance challenges, and refine case selection processes to reduce unnecessary “no-change” audits for taxpayers.

    Fortunately, our Dual-Licensed Tax Lawyers & CPAs can offer thorough support to those who have been persecuted by the new IRS division. We will handle all communications with the IRS and fight to have our clients’ potential penalties dismissed or reduced.

    How Does the IRS Uncover Tax Evasion Schemes?

    There are several different methods that the IRS uses to catch tax evaders. For instance, schemes may be uncovered through any of the following:

    Financial Data Analysis

    The IRS employs sophisticated financial data analysis techniques to identify potential tax evasion. This involves scrutinizing income and expenditure patterns, comparing reported income to available financial data, and flagging inconsistencies. Advanced algorithms and data mining are used to detect anomalies that may indicate tax evasion.

    Third-Party Reporting

    One of the primary ways the IRS uncovers tax evasion is through third-party reporting. Financial institutions, employers, and other entities are required to report certain financial transactions and income to the IRS. These reports are cross-referenced with taxpayer filings, and discrepancies are investigated. For example, the IRS receives W-2s from employers, 1099s from banks, and other forms that provide a paper trail of income and financial transactions.

    Whistleblower Program

    The IRS has a whistleblower program that encourages individuals with knowledge of tax evasion schemes to come forward. Whistleblowers can receive rewards for providing information that leads to the collection of unpaid taxes. This program incentivizes insiders and others with valuable information to report tax evasion, which can be a powerful tool in uncovering fraudulent activities.

    Data Sharing and Cooperation

    The IRS collaborates with other government agencies and international tax authorities to share information and uncover tax evasion schemes. Information-sharing agreements with foreign governments and agencies provide access to offshore financial data and help identify taxpayers hiding income in foreign accounts.

    Audits and Examinations

    Audits and examinations involve in-depth reviews of taxpayer records and financial documents. These examinations are conducted by IRS agents who assess the accuracy of tax returns and identify discrepancies. Audits can be triggered by red flags, such as unusually large deductions or income underreporting.

    Artificial Intelligence and Technology

    The IRS is increasingly using Artificial Intelligence (AI) and technology to uncover tax evasion. AI algorithms can analyze massive amounts of data quickly, identify patterns, and flag potential cases of tax fraud. Advanced technology also enables the IRS to improve case selection and target audits more effectively.

    Whistleblower Hotline

    The IRS operates a whistleblower hotline that allows individuals to report tax evasion anonymously. This hotline serves as a valuable source of tips and information that can lead to investigations into tax evasion schemes.

    Data Matching

    The IRS uses data-matching techniques to compare information from various sources, such as bank records, tax returns, and third-party reports. When discrepancies are identified, the IRS can initiate investigations to determine if tax evasion is occurring.

    Public Records and Open Source Intelligence

    The IRS also utilizes publicly available information and open-source intelligence to identify potential tax evasion. This includes information from court records, social media, and other public sources that may reveal undisclosed income or assets.

    Call Our Team for Help with Your Tax-Related Legal Issues

    Get assistance from our experienced Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or clicking here to book a reduced rate initial consultation.

    If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

    Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply. 

    It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.

    Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.

    As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs, and EAs, our firm provides a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!

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    Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business, and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

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