Update on IRS Enforcement Trends

By: Kevin M. Murphy, Esq.

We have all seen reports and studies lately regarding the “tax gap”, including one from the Treasury Inspector General for Tax Administration (TIGTA) describing millions lost to tax avoidance. These are usually followed by a statement from a member of Congress stating the urgent need to revise tax laws to collect more revenue from wealthy individuals and large corporations. To what extent laws are changed is anyone’s guess, but what seems certain is that the IRS will move to step up enforcement including civil and criminal fraud.

In a previous blog, we described how the IRS is gearing up to audit high-income non-filers. They also are moving to examine hundreds of global high-wealth individuals. According to the IRS, these cases will not only include the individual, but also any related entities such as passthroughs or private foundations.

Speaking on a web conference sponsored by NYU and the CPA Academy, Tamera Ripperda, IRS Tax-Exempt and Government Entities Division commissioner, noted IRS divisions’ historical hesitation to cooperate with each other. However, the global high-wealth initiative by the IRS is taking “an enterprise approach to data” and that the operation had started as an attempt to understand “whole enterprises at once”.  This is a changeup by the IRS since previous examinations crossing inter-divisional boundaries were historically cumbersome. A high-income individual’s enterprise could involve trusts, private foundations, tiered partnerships and retirement plans…all under different IRS operating divisions. In the past an investigation crossing divisional lines would be difficult. However, the agency’s increasing use of data analytics to uncover linkages is making such “whole enterprise” investigations fruitful. (1) Expect some of these global high-wealth audits to develop into civil and criminal fraud cases.

IRS use of data analytics and artificial intelligence as a tool in civil fraud and criminal cases is gaining steam. The IRS Office of Fraud Enforcement was established in March 2020. The office is led by a former director of Criminal Investigations (CI) International Operations. An unusual step for the IRS having an ex-criminal division director move to the civil side.  Its technical lead has a PHD, MBA and an MS in Accounting. There is also a dedicated office of National Fraud Counsel.  The Office of Fraud Enforcement’s focus is fraud identification, development of civil fraud penalty cases and potential criminal referrals. Aiding this process is the use of data analytics and artificial intelligence as standard tools. (2) Additionally, IRS CI is continuing a big push in data analytics as an investigation tool and as a method to identify cases to pursue. IRS special agents are all being trained on Palantir Technologies Artificial Intelligence software in order to manage data and linkages. According to IRS CI Chief Don Fort, this means the IRS using “models, algorithms, and millions of records and evidence”, to identify areas of tax noncompliance. (3)

The IRS first began using computers to select tax returns for audit in 1962. Discrimination Function Analysis, the so-called “DIF” score was developed in 1969. Now the IRS has access to an unprecedented amount of data and has started to use it.  One area ongoing, but still ripe for development is cryptocurrency. The IRS has stated that cryptocurrency-related tax compliance is abysmal. The enforcement of these cases will be data driven. (4)

IRS Commissioner Rettig has stated that with a name and a phone number, the IRS can accumulate an extraordinary amount of data. And Mr. Rettig has made it a priority to increase fraud referrals. His statements along with those of other IRS officials over the last year and a half throw out clear signals from the IRS that investigating and punishing fraud….either civil or criminal will be a growing focus. (5)    Along with artificial intelligence, the IRS is expected to improve its information return matching especially in targeted IRS enforcement actions such as PPP loans, employee retention credits, crypto-currency, syndicated conservation easements, high-income non-filers and micro-captive insurance. (6)

It’s now more apparent than ever that the IRS is committing more and more resources to close the tax gap and is using advanced technology to identify specific taxpayers as well as areas of concern. This will absolutely impact practitioners and their clients moving forward, so our best advice to them is to be prepared for the inevitable, and don’t be surprised when that IRS notices drops in your mailbox.  The good news is that when that notice does arrive, the attorneys at Andreozzi Bluestein will be there to help. Simply call us anytime for a no obligation consultation.

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  1. Tax Analysis 2020, (IRS to Start Hundreds of Global High-wealth Exams in July) (Nathan J. Richman) (Doc.2020- 23505) (June19, 2020)
  2. 8th Annual New England Tax Representation Conference, Federal Bar Association CLE, November 18-19, 2021
  3. “Latest on IRS Criminal Investigations”, Crouch, (MC Talks Tax) (May 22, 2019)
  4. Today’s CPA, “The IRS and Big Data”, Freeman, (January/February 2019)
  5. Daily Tax Report, “Insight: The IRS’ Renewed Focus on Fraud-Implications for Tax Practitioners”, Scott D. Michel, May 8, 2020
  6. 8th Annual New England Tax Representation Conference, Federal Bar Association CLE, November 18-19, 2021.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

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