IRS Update: Enhanced Compliance, Resumption of Notices, and Commissioner's Testimony

On January 29, the IRS announced the official start of the 2024 tax season - and indicated that the agency expects more than 128.7 million individual tax returns to be filed by the April 15, 2024, deadline.

Prior to this announcement, during the fall of 2023 the IRS made several other announcements regarding enhanced enforcement programs, the resumption of individual tax notices and related penalty abatement, and ongoing ERC enforcement measures. In addition, on February 15, 2024, around his first anniversary as top executive, IRS commissioner Daniel Werfel testified before the House Ways and Means Committee.

The following is a summary of the above.

Enhanced enforcement initiatives and improved service

September 8, 2023, announcement regarding shifting compliance focus & better service

On September 8, 2023, the IRS announced it is shifting its compliance focus and enforcement efforts onto high-income earners, partnerships, and large corporations. The agency indicated it plans to leverage the increased funding from the Inflation Reduction Act to deploy improved technology, including artificial intelligence (AI), used to select tax returns for audit. In addition, there are plans to target certain priority areas, such as digital assets, Report of Foreign Bank and Financial Accounts (FBAR) filings, and to improve audit and taxpayer protection in fiscal year 2024.

Regarding high-income earners, an IRS High Wealth, High Balance Due Taxpayer Field Initiative is intended to focus on taxpayers with more than $1 million in total positive income and $250,000 in federal income tax liabilities. 

With respect to partnerships, the IRS plans to expand the Large Partnership Compliance Program launched in 2021 by using AI to select additional large partnerships for examination. AI will be used to identify potential compliance around partnership tax, general income tax, and accounting and international tax to select returns for examination. The IRS hoped by late 2023 to open examinations of 75 of the largest partnerships in the US, each with average total assets of more than $10 billion, and representing several industries.

Other target compliance areas - digital assets and FBAR violations – The IRS announcement also indicated expanded efforts regarding digital assets. This is the result of an initial review as part of a Virtual Currency Compliance Campaign suggested the potential for 75% noncompliance with respect to digital currency exchanges. In addition, the IRS plans to audit what the agency considers to be egregious cases of non-filed Financial Bank and Financial Account Reports (FBARs). This could be significant for taxpayers not properly filing the FBAR, which is generally required if the aggregate value of all foreign financial accounts is more than $10,000 at any time, since a recent IRS memorandum regarding FBAR examination practices indicated an elimination of some FBAR penalty mitigation procedures.

Improvements to IRS service - Thankfully, in addition to the compliance and enforcement enhancements, the IRS announcement indicated intentions by the IRS to improve service. These include a) implementing new audit fairness safeguards for individuals claiming the Earned Income Tax Credit b) continuing efforts to alert consumers of emerging scams and schemes targeting taxpayers with modest incomes and c) protecting taxpayers against identity theft.

Additional announcement on October 20, 2023, regarding large corporation compliance & additional service improvements

Following up on the September announcement, on October 20, the IRS announced new initiatives with respect to enforcement efforts focused on large corporations and improvements to customer service and modernization of core technology infrastructure.

The large corporation enforcement efforts will mostly be directed at large foreign-owned businesses and corporations with average assets of more than $24 billion and average taxable income of approximately $526 million per year.

Regarding improved taxpayer service, the announcement included the following:

• Taxpayer Assistance Centers in underserved and rural communities
• Enhanced online capabilities, including plans, within the next five years, for taxpayers to be able to surely file all documents and respond to all notices online.
• Business tax accounts to allow business taxpayers to check tax payments, make tax payments, view notices, authorize powers of attorney and conduct other business with the IRS.

Comment – These 2023 announcements are an IRS effort to explain how the agency intends to use the additional funding provided to the IRS from the Inflation Reduction Act. While it appears that most of the enhanced enforcement and compliance initiatives will generally only affect large partnerships and corporations and high-income individuals, the customer service improvements could be beneficial to all taxpayers. Time will tell.

Resumption of issuance of individual tax notices & possible penalty abatement

During the COVID-19 pandemic, starting in February 2022, the IRS suspended the mailing of automated collection notice reminders to individuals, businesses, and tax-exempt organizations for tax years 2020 and 2021.

On December 19, 2023, the IRS announced it would restart sending these collection notice reminders and will also provide some new penalty relief for approximately 4.7 million taxpayers who would have received notices during the COVID-19 suspension period. Special reminder letters were sent beginning in January 2024. These reminder notices, likely in the form of letter LT38, Reminder, Notice Resumption, will remind the recipient about their tax liability and give them the opportunity to address the tax issue before more letters are sent. Taxpayers with long-standing unresolved tax issues will likely receive the next notice, advising them of the next, more serious, step in the tax collection process. The notice will also answer questions regarding how to pay the unpaid balance, including payment plans if the balance cannot be paid in full, and explain the following special penalty abatement program.

Automatic penalty relief of certain failure to pay penalties for tax years 2020 and 2021

The IRS announcement and the LT38, Reminder, Notice Resumption explain that the Internal Revenue Service automatically granted penalty relief of certain failure to pay penalties for individuals and businesses on tax years 2020 and 2021. If the affected taxpayer was assessed taxes of less than $100,000, the balance reflected on their letter for these tax years includes the automatic failure to pay penalty relief. It is important to note the relief only applies to penalties, not interest.

Also, the automatic penalty does not apply if the applicable tax assessed was $100,000. However, those taxpayers may still qualify for relief of certain failure to pay penalties. For more information regarding penalty relief, including the First Time Abate program please see this link -  Penalty Relief - on the IRS website, and the penalty relief discussion in our previous IRS update article Catching up with IRS news.

Comment – The resumption of IRS collection notices is probably unwanted but expected news, and the specific automatic penalty abatement certainly is good news. If you receive one of these IRS notices, or generally any tax notice, you should probably review it with your Herbein tax adviser before taking any action.

IRS Commissioner Daniel Werfel testifies before the House Ways and Means Committee

On Thursday, Feb. 15, IRS Commissioner Daniel Werfel testified before the House Ways and Means Committee. Here are some noteworthy items included in his testimony:

• 2024 filing season is off to a strong start – Werfel stated that “the 2024 filing season is off to a strong start, and, assuming the agency receives adequate funding going forward, the future holds great promise for the agency and the taxpayers we serve.”
• Implementation of retroactive provisions in Tax Relief for American Families & Workers Act of 2024 – During the hearing, lawmakers asked the commissioner to guarantee that, if enacted, taxpayers would realize the benefits of the new law this tax filing season. Werfel indicated that the IRS is “poised to move quickly” on the bipartisan tax bill and is “paying close attention” to the legislation. He added “We may be able to start implementations (as) early as six to 12 weeks after passage, depending on the bill’s final language, but taxpayers should not wait for this legislation to file their returns. We will take care of getting any additional refunds to taxpayers who have already filed. They won’t need to take additional steps.”
• Frustration over 1099-K reporting requirements – Some lawmakers complained regarding the proposed $600 lower threshold for 1099-K reporting, which, although temporarily delayed, is scheduled to take effect in 2025, and questioned the IRS authority to set the new threshold. The commissioner responded that "We have an authority under the Code to administer laws consistent with taxpayer rights," and added that he was not the first IRS commissioner to take similar action.

In other Form 1099-K news, the IRS recently issued this update Understanding your Form 1099-K.

• IRS funding – The increased IRS funding from the Inflation Reduction Act (IRA) was a significant, if not the major, issue raised by the lawmakers. Some on the committee complained that, notwithstanding promises by Treasury Secretary Yellen that audits would focus on taxpayers making over $400,000, they believed that middle- and lower-class taxpayers were being targeted by an “army” of new IRS agents. Commissioner Werfel responded that providing the IRS with long-term funding will help close the tax gap. He cited a 2022 Congressional Budget Office (CBO) report that estimated that the IRS funding in the IRA would increase tax revenues by over $180 billion over 10 years, and he stated that “For every $100 million taken from the IRS, the deficit grows by $600 million over 10 years,”

Comment – The testimony of the IRS commissioner did not include any newsworthy revelations. However, it did reiterate the political challenge regarding the increased IRS funding under the IRA. An issue that may be significant in the 2024 presidential campaign.

FINAL THOUGHTS

The tax season has just begun – and a lot is already happening with the IRS.

If you have questions regarding this article or other IRS matters, please contact your Herbein tax adviser.

Article Contributed by Barry Groebel.