IRS’ focus on high-net-worth taxpayers brings in over $1 billion

Over the past year, the IRS used a significant funding increase from the Inflation Reduction Act (IRA) to launch enforcement efforts targeting high-net-worth taxpayers. The IRS is calling these efforts a success, recently announcing that they have recovered over $1 billion from high-net-worth individuals. We expect this to be just the beginning of the IRS’ increased enforcement measures, so it’s important for high-net-worth taxpayers to take steps now to be prepared.

The path to increased IRS enforcement

The IRA was enacted in 2022, and it allocated significant new funding to the IRS. The IRS has used the increased funding for projects ranging from technology and information security improvements to enforcement initiatives. A July 11, 2024 IRS press release announced the agency’s collection of $1 billion from high-net-worth taxpayers as a result of enforcement efforts focused on this taxpayer population. IRS Commissioner Danny Werfel credited IRA funding for these results and provided details about the IRS’ focus areas.

The recent enforcement efforts targeted a specific population of high-net-worth taxpayers — 1,600 individuals whose incomes were more than $1 million per year and who each owed the IRS more than $250,000 — but the IRS’ focus is expected to continue widening, so all high-net-worth taxpayers should take steps to be prepared. In the past year, the IRS has announced a focus on a number of issues that impact high-net-worth taxpayers, including:

• New effort aimed at high-net-worth taxpayers who failed to file required returns.
• The development of artificial intelligence tools to identify under reported income taxes.
• The formation of a specialty team in the IRS chief counsel’s office to examine complex partnerships.
• New focus on abusive transactions and issues with high potential for recovery, like basis-shifting partnership transactions and use of luxury transportation vehicles.

What should taxpayers be doing now?

Given the IRS’ increased enforcement efforts, high-net-worth taxpayers should start taking steps now to prepare for IRS audits and other enforcement efforts and reduce the likelihood that the IRS will make adjustments to their returns.

• Robust, accurate documentation: Taxpayers should perform due diligence to ensure tax positions are accurately reported, but maintaining documentation to support tax positions is just as important. IRS agents are digging deeper during IRS audits and expecting taxpayers to produce more documentation to support their reporting positions. In the event of an examination, contemporaneous and detailed documentation to support tax positions is critical. Taxpayers should get in the habit of maintaining good contemporaneous documentation and review existing documentation they have to support the prior three tax years.
• Recognize the importance of the right tax structure: Certain entity structures like complex partnerships are drawing more attention from IRS agents. The IRS also tends to review Schedule C returns more often when the taxpayer reports large amounts of income or loss. Determining the best tax structure for high-net-worth taxpayers involves the examination of complex factors, and it is best to rely on a trusted tax professional for advice on tax structuring.
• Exercise care when reporting use of luxury transportation vehicles: IRS audits of taxpayers claiming business expenses for luxury goods such as corporate jets and boats or yachts have become increasingly common in recent years. Contemporaneous, detailed documentation is required to support the business use of luxury vehicles, so taxpayers should develop the habit of tracking this information contemporaneously. Taxpayers should also consider consulting with a trusted tax advisor on the appropriate business use of these goods and how to adequately document business use of luxury vehicles.
• If it seems too good to be true, it probably is: Conducting business as a partnership can be a useful form of tax planning, but it can often have complex tax consequences, creating opportunities for abuse. Partnership transactions executed solely for the purpose of shifting basis may create opportunities for significant tax savings, but they’re viewed as abusive to the tax system. High-net-worth clients should exercise caution and consult a trusted tax advisor when considering a partnership transaction that seems too good to be true.
• A trusted tax advisor is your best weapon: The IRS has hired a slew of agents to target sophisticated transactions and issues with high opportunities for recovering tax revenue, and the best way for high-net-worth taxpayers to prepare is to get quality advice from a trusted tax advisor. Many of the IRS’ special enforcement projects involve complex and uncertain tax areas; preparing for IRS audits on these issues requires quality advice and careful planning.

What to expect for the future?

The IRS is hard at work using IRA funds to improve their processes, develop new tools, train new agents, and expand its tax enforcement teams. The IRS is now facing pressure to demonstrate the effectiveness of this funding, and we’ll likely continue seeing enforcement efforts increase over time. Commissioner Werfel has stated that the collection results achieved from enforcement efforts over the past year provide encouragement for the IRS to continue to ramp up enforcement efforts. Taxpayers should expect increased assessment and enforcement efforts to be the new normal, and they should take steps to prepare. Relying on trusted tax controversy practitioners to help defend an audit or enforcement matter can help taxpayers navigate the complexities of increasing IRS enforcement.