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

The Internal Revenue Service today announced the release of draft Form 6765, Credit for Increasing Research ActivitiesPDF, also known as the Research Credit.

The IRS received helpful comments from various external stakeholders that have informed several revisions the IRS is making to reduce taxpayer burden. The feedback and changes will alleviate taxpayer burden, provide taxpayers with a consistent and predefined format and improve the information received for tax administration.

The changes include:

Optional reporting of Section G

Section G, which was labeled “Section F” in the version of the form that IRS shared last fall, requests the Business Component Detail. The instructions will provide that Section G will be optional for:

• Qualified Small Business (QSB) taxpayers, defined under section 41(h)(1) & (2) who check the box to claim a reduced payroll tax credit; or
• Taxpayers with total qualified research expenditures (QREs) equal to or less than $1.5 million, determined at the control group level, and equal to or less than $50 million of gross receipts, as determined under section 448(c)(3) (without regard to subparagraph (A) thereof), claiming a research credit on an original filed return.

Reduced scope of Business Component Detail and other revisions

In response to feedback from stakeholders, the IRS reduced the number of business components that must be reported on Section G. Taxpayers should report 80% of total QREs in descending order by the amount of total QREs per business component, but no more than 50 business components (with special instructions for taxpayers using the ASC 730 directive who can report ASC 730 QREs as a single line item on Section G).

The amount of information that must be provided with respect to the reduced number of business components on Section G has also been reduced. For example, the IRS eliminated whether a business component is new/improved, a sale/license/lease and the narrative requirement (for original returns) that describes the information sought to be discovered. The selections for the type of business component are reduced, and the definitions for officers, controlled group reporting and business component descriptive names will be clarified in the instructions.

The revised Section G will be optional for all filers for tax year 2024 (processing year 2025). This will allow taxpayers time to transition to the Section G format. Section G will be effective for tax year 2025 (processing year 2026), subject to the guidelines noted above.

On Sept. 15, 2023, the IRS released a preview of proposed changes to Form 6765 and solicited comments from interested parties. The preview included a new Business Component Detail section for reporting quantitative and qualitative information for each business component, new questions seeking various information and reordering some of the existing questions on the form. The solicitation requested feedback on whether the new Business Component Detail section should be optional for certain taxpayers.

Please see Form 6765PDF. Instructions will be released at a later date.

Source: IRS-2024-171, June 21, 2024

The Department of the Treasury and the Internal Revenue Service issued final regulations today on the prevailing wage and apprenticeship (PWA) requirements related to increased credit or deduction amounts for certain clean energy incentives, enacted as a part of the Inflation Reduction Act (IRA).

The IRA provides increased credit or deduction amounts for taxpayers who satisfy certain PWA requirements regarding the construction, alteration or repair of certain clean energy facilities or properties, projects or equipment. By satisfying the PWA requirements, taxpayers can generally increase the base amount of the credit or deduction by five times.

“The increased credit or deduction for taxpayers meeting prevailing wage and apprenticeship requirements creates opportunities for both workers and employers,” IRS Commissioner Danny Werfel said. “The IRS is committed to ensuring that taxpayers claiming the clean energy credits comply with all of the applicable prevailing wage and apprenticeship requirements. The additional resources the IRS has received are making a difference for our efforts to ramp up taxpayer service and enforcement, and we will continue to build on these improvements.”

To qualify for the PWA increased credit or deduction amounts, taxpayers generally need to:

• Ensure that laborers and mechanics employed in the construction, alteration or repair of the facility or property, project or equipment are paid wages at rates not less than applicable prevailing wage rates.
• Meet certain requirements related to employing qualified apprentices from registered apprenticeship programs.
• Meet specific recordkeeping and reporting requirements.

The PWA requirements apply to all contractors and subcontractors of the taxpayer who employ laborers and mechanics in construction, alteration or repair work. However, taxpayers claiming the increased credit or deduction are solely responsible for ensuring that the PWA requirements are satisfied.

Ensuring that taxpayers claiming the PWA increased credit or deduction amounts have met the requirements – along with enforcing the requirements for other clean energy tax credits – is a top priority for the IRS. In the months ahead, the IRS will dedicate significant resources to promoting and enforcing compliance with the final clean energy rules.

The IRS is committed to working with taxpayers, their advisors and other stakeholders to ensure compliance, including conducting appropriate education and outreach. The IRA funding will support efforts for effective tax administration of these novel and cross-cutting provisions.

As part of this effort, the IRS also released Publication 5983, IRA Prevailing Wage and Apprenticeship Requirements Fact SheetPDF updated Publication 5855, IRA Prevailing Wage & Registered Apprenticeship OverviewPDF and the Prevailing wage and apprenticeship frequently asked questions.

Publication 5855 provides a summary of the PWA requirements. The frequently asked questions provide more details about the PWA requirements and information for how to alert the IRS of suspected tax violations related to the PWA requirements. The IRS takes referrals of alleged tax violations seriously and may use the information received about potential violations in connection with any applicable audit.

The PWA provisions include a significant penalty framework for failures to meet the PWA requirements. The penalty structure is intended to create incentives for real-time compliance with the PWA requirements.

Given the potential increased credit or deduction amounts available under the PWA provisions and the significant penalties at stake, taxpayers should consider establishing frameworks to support timely compliance with the PWA requirements, including the associated reporting and recordkeeping requirements. To minimize the potential for mistakes and significant penalties, taxpayers who know they intend to claim an increased credit or deduction amount through satisfaction of the PWA requirements should proactively take steps to position their project for compliance with the PWA requirements.

These steps could include, but would not necessarily be limited to:

• Regularly reviewing payroll records.
• Ensuring all contracts require that contractors and their subcontractors adhere to PWA requirements.
• Regularly reviewing the classifications of laborers and mechanics, prevailing wage rates, and percentage of labor hours to be performed by qualified apprentices.
• Posting information about prevailing wage rates in a prominent and accessible location or otherwise providing written notice of prevailing wage rates to laborers and mechanics during construction, alteration, and repair work.
• Establishing procedures for individuals to report suspected failures to comply with the PWA requirements without fear of retaliation or adverse action.
• Investigating reports of suspected failures to comply with the PWA requirements.
• Contacting the Department of Labor’s Office of Apprenticeship or the relevant state apprenticeship agency for assistance in locating registered apprenticeship programs.

The U.S. Department of Labor (DOL) determines the applicable prevailing wage rates for each classification of laborers and mechanics in a prescribed geographic area for a particular type of construction. For more information about prevailing wage rates please visit the Department of Labor’s website.

To support the IRS’s efforts in ensuring taxpayer compliance with the PWA requirements, DOL and the IRS are working on a Memorandum of Understanding (MOU) to be signed by the end of the year. Harnessing DOL’s extensive prevailing wage and registered apprenticeship expertise, the MOU will facilitate joint and cooperative education and public outreach and development of training content for IRS examination personnel. The MOU will also facilitate DOL’s review and comment as part of the development of PWA tax forms. Finally, the MOU will formalize a process for DOL to share with the IRS any credible tips or information that DOL receives as to potential noncompliance with the PWA requirements.

More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.

Source: IRS-2024-168, June 18, 2024

The Department of the Treasury and Internal Revenue Service issued Revenue Procedure 2024-26PDF today for the submission of information by qualified manufacturers of new clean vehicles and dealers and sellers of new clean vehicles and previously-owned clean vehicles.

Today’s guidance provides additional procedures for qualified manufacturers to submit attestations, certifications and documentation demonstrating the qualified manufacturer’s compliance with certain requirements regarding new clean vehicles placed in service after Dec. 31, 2024.

The guidance updates procedures for qualified manufacturers to submit information regarding new clean vehicles for upfront review by the IRS, with analytical assistance from the Department of Energy, to ensure the vehicles satisfy relevant requirements for the calendar year and are eligible for the new clean vehicle credit.

Finally, this revenue procedure provides rules regarding seller report updates and rescissions and provides clarification for qualified manufacturers for the transition rule for impracticable-to-trace battery materials.

More information can be found on the Inflation Reduction Act of 2022 page on IRS.gov.

Source: IRS-2024-158, June 7, 2024

The Internal Revenue Service announced today reaching another key milestone in the agency’s transformation work with the Document Upload Tool accepting its one millionth taxpayer submission.

Use of the Document Upload Tool, sometimes referred to as DUT, continues to grow. During the first six months of this fiscal year, more than 265,000 taxpayers used the tool, and the number continues to grow each month.

Initially launched in 2021 in a limited format and greatly expanded in 2023 with funding from the Inflation Reduction Act (IRA), the tool offers taxpayers and tax professionals the option to respond digitally to eligible IRS notices by securely uploading required documents online through IRS.gov. For anyone with a smart phone or computer, this means that replying to IRS notices is now often as easy as scanning required documents and uploading them to the tax agency.

“The Document Upload Tool is a key part of our ambitious initiative to transform the IRS into a virtually paperless agency, and we continue to see increased use of this by taxpayers,” said IRS Commissioner Danny Werfel. “This tool saves time for taxpayers and helps IRS employees process responses faster and more efficiently. A growing number of taxpayers are using their smart phones or computers to scan and upload their responses to IRS correspondence, rather than the more time-consuming option of writing a letter or mailing in documents.”

The Document Upload Tool has shown steady growth over time as well. Since 2022, average monthly use of the DUT has more than doubled every year, from around 16,000 in 2022, to around 37,000 in 2023 and finally almost 84,000 so far in 2024. The document submissions cover a wide range of tax issues, including responding to IRS Notice CP2000, where the agency notifies taxpayers of potentially underreported income.

The IRS receives about 76 million paper tax returns and forms, as well as 125 million pieces of correspondence, notice responses and non-tax forms each year. In the past, the agency’s limited capability to accept these forms digitally or to digitize paper has added time-consuming steps that has created challenges for taxpayers, tax professionals and IRS employees. For decades, the only option available was to have taxpayers or their representatives mail or fax these documents to the tax agency.

The IRS estimates that more than 94% of individual taxpayers will have the option of no longer having to send mail to the IRS, potentially replacing up to 125 million paper documents per year, easing the paperwork burden for both them and the IRS.

The IRS team of leaders that oversaw last year’s sweeping DUT expansion is now a finalist for the 2024 Samuel J. Heyman Service to America Medals. Known as the Sammies, the Samuel J. Heyman Service to America Medals are considered to be the “Oscars” of public service.

To learn more about the Document Upload Tool, visit IRS.gov/dut.

Source: IRS-2024-155, June 5, 2024