As part of continuing compliance efforts under the Inflation Reduction Act, the Internal Revenue Service today announced the agency has surpassed the $1 billion mark in collections from high-wealth taxpayers with past-due taxes.

As part of larger efforts taking place, the IRS has stepped up activity specifically on 1,600 individuals whose incomes were more than $1 million per year and who each owed the IRS more than $250,000 in recognized tax debt. Since last fall, this IRS compliance effort has generated more than $1 billion in collections from this group, with work continuing in this area.

“With this collection activity, the IRS passed an important milestone in our effort to improve compliance and ensure fairness in the tax system,” said IRS Commissioner Danny Werfel. “Our increased work in this area means these past-due tax bills from high-end taxpayers are no longer being left on the table, like they were too often in the past.”

“Years of funding declines meant the IRS couldn’t get to money that we knew was owed, but we simply didn’t have the resources or staffing to collect,” Werfel added. “Funding from the Inflation Reduction Act is reversing a decade-long decline in our compliance work, including increasing our compliance work involving the wealthiest individuals and groups with tax issues. The collection results achieved in less than a year reveal the magnitude of what can be achieved over the long run as our Inflation Reduction enforcement continues to ramp up in the months ahead.”

Werfel noted that Inflation Reduction Act resources continue to help in a variety of areas. In addition to improving taxpayer service during the successful 2024 filing season, the IRS has focused IRA resources on expanded enforcement work to pursue complex partnerships, large corporations and high-income, high-wealth individuals who do not pay overdue tax bills.

“We continue working to add staff and technology to ensure that the taxpayers with the highest income, including partnerships, large corporations and millionaires and billionaires, pay what is legally owed under federal law,” Werfel said. “At the same time, we are focused on improving our taxpayer service for hard-working taxpayers. The additional resources the IRS received under the Inflation Reduction Act are making a difference, both for taxpayers who play by the rules and those who don’t.”

Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented the IRS from keeping pace with the increasingly complicated maneuvers that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is continuing to take action to close this gap.

Today’s announcement involves a segment of high-income individual taxpayer cases. Last fall, the IRS ramped up efforts to pursue high-income, high-wealth individuals who failed to pay a tax bill. These high-end collection cases are concentrated among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt.

Out of a total of 1,600 of these cases, the IRS has assigned 1,500 to revenue officers, with over $1 billion collected so far. The $1 billion collected through spring represents payments from over 1,200 individuals, with the IRS anticipating the figure to grow in the months ahead.

IRS continues work on high-wealth non-filers, complex partnerships, large corporations

The IRS has a variety of other efforts underway to improve tax compliance in overlooked areas where the agency did not have adequate resources prior to Inflation Reduction Act funding.

Earlier this year, the IRS announced a new effort focused on high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017. Non-filers receive IRS compliance letters alerting them that the IRS is aware of their missing return and encouraging them to file or contact the IRS. The new initiative involves more than 25,000 people with more than $1 million in income, and over 100,000 people with incomes between $400,000 and $1 million between tax years 2017 and 2021.

These are all cases where the IRS has received third party information—such as through Forms W-2 and 1099s—indicating these people received income in these ranges but failed to file a tax return. Without adequate resources, the IRS non-filer program has only run sporadically since 2016 due to severe budget and staff limitations that didn’t allow these cases to be worked. With new Inflation Reduction Act funding available, the IRS now has the capacity to do this core tax administration work.

The IRS anticipates having more details related to this non-filer initiative later this year.

Other elements of the agency’s renewed compliance focus include:

• Abusive use of partnerships. Last month, the IRS announced a new series of steps to combat abusive partnership transactions that allow wealthy taxpayers to avoid paying what they owe.
• Activities involving large corporations and partnerships. These efforts include opening examinations of 76 of the largest partnerships in the U.S., representing a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. Other activities include expanding the large corporate compliance (LCC) program.
• Aircraft use. In February, the IRS announced plans to begin dozens of audits involving personal use of business aircraft. The audits will focus on aircraft usage by large corporations, large partnerships and high-income taxpayers. The IRS will examine whether the use of jets is being properly allocated between business and personal use.

Source: IRS-2024-185, July 11, 2024

The U.S. Department of the Treasury and the Internal Revenue Service today issued final regulationsrequiring custodial brokers to report sales and exchanges of digital assets, including cryptocurrency. These reporting requirements will help taxpayers to file accurate tax returns with respect to digital asset transactions, which are already subject to tax under current law.

These final regulations reflect consideration of more than 44,000 public comments received last fall on the proposed regulations. They require brokers to report certain sale and exchange transactions that take place beginning in calendar year 2025 and will be reported on the soon-to-be released Form 1099-DA. The regulations implement reporting requirements by the Infrastructure Investment and Jobs Act, enacted in 2021.

“We reviewed thousands of public comments and believe this new guidance addresses those concerns while striking a balance between industry implementation challenges and closing the tax gap related to digital assets,” said IRS Commissioner Danny Werfel. “These regulations are an important part of the larger effort on high-income individual tax compliance. We need to make sure digital assets are not used to hide taxable income, and these final regulations will improve detection of noncompliance in the high-risk space of digital assets. Our research and experience demonstrate that third-party reporting improves compliance. In addition, these regulations will provide taxpayers with much needed information, which will reduce burden and simplify the process of reporting their digital asset activity.”

“Our work to address potential non-compliance in digital currency is another reason why it is so critical to fully fund IRS operations,” Werfel added. “These new assets expand the complexity of our tax system, and the technology and personnel necessary for the IRS to keep pace with these changes is resource intensive. Ultimately, this IRS funding helps address emerging issues and creates significantly more savings than costs to the government’s bottom line.”

The final regulations require reporting by brokers who take possession of the digital assets being sold by their customers. These brokers include operators of custodial digital asset trading platforms, certain digital asset hosted wallet providers, digital asset kiosks, and certain processors of digital asset payments (PDAPs). The majority of digital asset transactions today occur using these brokers. By focusing first on this group, the IRS intends these regulations to cover the greatest number of taxpayers while allowing the IRS and U.S. Treasury Department more time to consider the nuances of transactions involving non-custodial and decentralized brokers.

The final regulations do not include reporting requirements for brokers that do not take possession of the digital assets being sold or exchanged. These brokers are commonly called decentralized or non-custodial brokers. The U.S. Treasury Department and the IRS intend to provide rules for these brokers in a different set of final regulations.

In addition to the broker reporting rules, the regulations provide rules for taxpayers to determine their basis, gain, and loss from digital asset transactions. The regulations also provide backup withholding rules.

The IRS is aware of the challenges that implementing new reporting requirements can pose, which is why the agency is also providing transitional and penalty relief from reporting and backup withholding rules on certain transactions to help phase-in implementation.

Real estate professionals are also required to report the fair market value of digital assets paid by buyers and received by sellers in real estate transactions with closing dates on or after January 1, 2026.

The final regulations provide for an optional, aggregate reporting method for certain sales of stablecoins and certain non-fungible tokens (NFTs) applicable only after sales of these stablecoins and NFTs exceed de minimis thresholds. For PDAP transactions, the regulations require reporting on a transactional basis only if the customer’s sales are above a de minimis threshold.

Finally, basis reporting will be required by certain brokers, for transactions occurring on or after January 1, 2026.

Additional guidance to provide transitional relief regarding digital asset transactions includes:

Transitional relief

Notice 2024-56 PDF provides general transitional relief from reporting penalties and backup withholding for any broker who does not timely and accurately file information returns and furnish payee statements for sales and exchanges of digital assets during calendar year 2025, provided that the broker makes a good faith effort to comply with the reporting obligations. Additionally, the notice provides more limited relief from backup withholding for certain sales of digital assets during 2026 for brokers using the IRS’s TIN-matching system in place of certified TINs. Finally, the Notice also provides backup withholding relief for exchanges of digital assets in return for specified NFTs and real property and for certain sales effected by PDAPs.

Delay on information reporting for certain transactions until future guidance is issued

Notice 2024-57 PDF informs brokers that until the U.S. Treasury Department and the IRS issue further guidance, brokers will not have to file information returns or furnish payee statements on digital asset sales and exchanges for the following six types of transactions:

1. Wrapping and unwrapping transactions,
2. Liquidity provider transactions,
3. Staking transactions,
4. Transactions described by digital asset market participants as lending of digital assets,
5. Transactions described by digital asset market participants as short sales of digital assets, and
6. Notional principal contract transactions.

Transition from universal or multi-wallet approach to allocating basis in digital assets to wallet by wallet or account by account approach. Revenue Procedure 2024-28 PDF generally permits taxpayers to rely on any reasonable allocation of units of unused basis to wallets or accounts that hold the same number of remaining digital asset units based on the taxpayers’ records of unused bases and remaining units in those wallets or accounts.

Source: IRS-2024-178, June 28, 2024

The Internal Revenue Service switched over from focusing its audits on taxpayers earning $10 million or more to those earning $400,000 or more after passage of the Inflation Reduction Act, according to a new report.

The report, released Monday by the Treasury Inspector General for Tax Administration, noted that in 2020, then-Treasury Secretary Steven Mnuchin directed the IRS to audit a minimum of 8% of individual tax returns filed each year with incomes of $10 million or more. The IRS was supposed to meet that goal starting with 2016 tax returns, but for legal and staffing reasons it began instead with 2018 tax returns. The IRS complied with that directive for three years, but then the agency stopped because officials said the examinations were unproductive due to a high no-change rate. Instead, they shifted their focus to examinations of individuals with incomes of $400,000 or more. More recently, the IRS updated its strategic operating plan for the Inflation Reduction Act of 2022 to focus its audits more on large partnerships and corporations as well as high-income taxpayers.

In February 2020, Mnuchin directed the IRS to audit at least 8% of all high-income individual returns filed each year. In March of that year, IRS Commissioner Chuck Rettig responded that accomplishing the goal would require significant costs but he agreed to comply, specifying a total positive income level of $10 million or more to select returns.  In August 2022, Congress enacted the Inflation Reduction Act, which in part aimed to fund the IRS so it could examine more high-income taxpayers. In an August 2022 directive to the IRS, Treasury Secretary Janet Yellen said no Inflation Reduction Act funding should be used to increase the audit rate of taxpayers with incomes below $400,000. That effectively lowered the threshold.

TIGTA found the IRS complied with the 2020 Treasury Directive for three tax years but stopped monitoring it at the end of fiscal year 2023. An IRS executive told TIGTA in December 2022 that the 2020 Treasury Directive would no longer be followed because the audits were unproductive and had high no-change rates. The IRS said it was embarking on a different approach, focusing on complying with the 2022 Treasury Directive.

In February 2023, IRS executives informed TIGTA that the IRS would continue to audit high-income individual returns with total positive income of $10 million or more but would not aim to achieve the 8% audit rate in the future. IRS executives said at that time that they considered the 2020 Treasury Directive obsolete. The executives explained that the IRS’s new focus would be on compliance with the 2022 Treasury Directive to expand examinations of individuals with incomes of $400,000 or more. In November 2023, the SB/SE Division informed TIGTA that it would no longer generate the agency-wide Audit Rate $10M Monitoring Report and that the last report prepared was through the end of fiscal year 2023. Therefore, the IRS no longer monitors whether it has met or needs to put in process additional examinations to meet the 8% audit rate goal established by the 2020 Treasury Directive for high-income individuals with total positive income of $10 million or more.

TIGTA found that many of the examined returns under the 2020 Treasury Directive were productive, but that depended on which function in the IRS conducted the examinations and which case selection methods were used. The Small Business/Self Employed Division’s closed examinations of individual taxpayer returns with income of $10 million or more, in tax years 2016 through 2021, were generally more productive than income ranges below $10 million. Those higher income ranges yielded four times more dollars assessed per return and twice as many dollars assessed per hour when compared to examinations of returns with income of $400,000 to under $10 million.

On the other hand, the IRS’s Large Business and International Division case selection methods that were in place prior to the 2020 Treasury Directive resulted in better productivity metrics when compared to later results. For example, the no-change rate has increased when comparing pre-directive tax years (tax years 2016 through 2017) to post-directive tax years (tax years 2018 through 2020).

TIGTA also found that some of the opportunity costs the IRS identified at the outset of the 2020 Treasury Directive were overstated by 190 examinations of large and midsized businesses.

TIGTA made two recommendations in the report. It suggested the IRS include a separate category for taxpayers with total positive income of $10 million or more when evaluating the compliance of high-income individual taxpayers for an initiative of the IRS strategic operating plan in order to track and analyze the productivity of examinations on these high-income individual returns in comparison to examinations of taxpayers at other income levels. It also recommended the IRS identify the potential causes behind the Large Business and International Division’s low productivity examination results and monitor the measures so the most productive returns would be selected for examination.

The IRS partially agreed with both of the report’s recommendations and said it already categorizes and monitors productivity measures for high-income high-wealth taxpayers, including those with total positive income of $10 million or more. The IRS said it would identify the potential causes for the low productivity examination results and use enhanced data and analytics to select cases based on the highest risk of noncompliance.

“The IRA provided much-needed funding for the IRS to enforce the tax laws against those wealthy individuals, large corporations and large, complex partnerships who today do not pay what they owe,” wrote Lia Colbert, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “The IRS will not use IRA resources to increase audits for small businesses and taxpayers making under $400,000. Accordingly, the IRS is focusing on high income, high wealth taxpayers, including those reporting $10 million or more, to ensure this population of taxpayers pays what it owes.”

She noted that the IRS recovered $520 million as of Jan. 2024 from taxpayers with more than $1 million in income who have either not filed their taxes or failed to pay their tax debts.

Source: AccountingToday