Forewarned is forearmed.

On September 8th, IRS Commissioner Danny Werfel (no not the Florida Gator Quarterback, Heisman Trophy Winner Danny Werfel) issued a news release that probably didn’t make it onto your radar screen. Here’s the heading:

“IRS announces sweeping effort to restore fairness to tax system with Inflation Reduction Act funding; new compliance efforts focused on increasing scrutiny on high-income, partnerships, corporations and promoters abusing tax rules on the books.”

Who can complain about “fairness?” Well for starters we have been repeatedly told the words of Scar, brother of Mufasa, “Life’s not fair.” That fact is confirmed by Calvin’s Dad, of Calvin and Hobbs fame, “The world isn’t fair, Calvin.” “I know Dad, but why isn’t it ever unfair in my favor?” We all probably share Calvin’s perspective. In this announcement, our concern should be whether our idea of fairness coincides with the IRS Commissioner’s idea of fairness.

But wait, there’s a sub-heading:

“Agency focus will shift attention to wealthy from working-class taxpayers; key changes coming to reduce burden on average taxpayers while using Artificial Intelligence and improved technology to identify sophisticated schemes to avoid taxes.“

What does this tell us? First, if you are a working-class, “average” taxpayer, you probably have nothing to worry about. In fact, the third section of this release enumerates the ways in which the IRS will be helping working taxpayers by “improving compliance selections” and protecting them “from aggressive scams and schemes.” I think this is saying that if you fall into their definition of working-class, average, your chance of audit just went down. And whose chance of audit just went up?

Bullet number one of three says: “Major expansion in high-income/high-wealth and partnership compliance work.” Just to be clear, “compliance” means complying with the Income Tax Laws with respect to what goes, or doesn’t go, on your tax return. This is clear, if you fall in their definition of “high-income/high-wealth” your chance of audit just went up. 

In the first paragraph of this section: “Prioritization of high-income cases”, the Service goes on to proudly say, “the IRS will intensify work on taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt. Building off earlier successes that collected $38 million from more than 175 high-income earners, the IRS will have dozens of Revenue Officers focusing on these high-end collection cases in FY 2024.” If you fall in that area you might want to meet with your CPA to examine any areas of potential risk.

The second paragraph of this section will really give you warm fuzzies: “Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI)”. So now we learn that they are using AI to back into difficult to trace information for partnerships designed to skirt income tax laws! Well, isn’t that special? I’m not sure that I have a problem with that.

I don’t think many of our clients have a great deal to worry about. The returns I’ve reviewed are pretty “plain vanilla.” Yet I will say this, “If you are in the top 1% of income earners, I would recommend that you not engage in aggressive tax schemes. Their days are numbered and the cost of playing those games could get very expensive.”

As I have mentioned in the past, we are reviewing tax returns to simply look for areas where you might not be utilizing basic tax planning opportunities based on your specific situation. These don’t fall into the issues specifically raised by this release. If we can be of help, please reach out.

Rick Adkins, CFP®, ChFC, MBA

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