The IRS is hiring hundreds of new auditors as it gears up for a potentially massive tax-enforcement push after President Biden proposed increasing the agency’s budget for enforcement by $80 billion over 10 years.
The IRS has already announced plans to hire some 2,000 workers before the end of September as part of an effort to replace the more than 17,000 audit staff lost since 2010, said Diane Compardo, partner at Moneta in St. Louis. “Some 1,300 of the new hires are expected to be revenue agents and up to 500 will be in the IRS Criminal Investigation unit. To put this in context, the IRS has hired fewer than 350 criminal investigation employees since 2014.”
The IRS would also require financial institutions to provide information about account inflows and outflows, including for loans and investments and cryptocurrency.
“The changes to information reporting alone is projected to raise $460 billion over the next decade,” said Brent Lipschultz, partner in the New York office of EisnerAmper LLP. “Overhauling outdated technology will, according to the government, help identify tax evasion by wealthy clients.”
“If I were very wealthy and had any doubts about the correctness of all of my tax returns and behavior, I would be terrified in today’s climate,” said Morris Armstrong, an RIA at Armstrong Financial Strategies in Cheshire, Conn. “Right now, the IRS can go after a million tax cheats and collect X. With the added budget, they can go after 10,000 and collect an equal amount but that will involve more litigation, research and risk. Obviously, when you have substantial wealth, you’re more likely using more sophisticated [tax and investment] vehicles that must be examined, and that takes time and manpower.”
A recent report from the Treasury inspector general for tax administration said that the IRS has failed to bring in as much tax revenue as possible from wealthy taxpayers in the last few years. Robert Karon, CPA and J.D., Minneapolis-based managing director at CBIZ MHM, said that this “tax gap” has almost doubled in the past decade from about $380 billion annually to about $700 billion or more today.
Pressure on richer taxpayers is already evident against those who have tried such tax tactics as conservation easements to claim large charitable deductions over the past decade, said Compardo, who added that she does not recommend using such easements. “Many wealthy taxpayers used them aggressively to offset taxable income. The IRS is taking a very tough position against those taxpayers today and currently refusing to budge or negotiate. We’ll see more of this in other areas, including income, estate and gift tax audits,” she said.
Lipschultz recommends clients maintain records through the entire statute of limitations period (usually at least about three years), adding that his firm sometimes puts clients through mock audits to make sure they have the proper documentation to get through the real thing.
This enforcement remains far from reality. “It’ll take a number of years, maybe several, for higher audit rates to come out and for the IRS to train competent people and new auditors to do this,” Karon said. “The IRS has about a third or more of their workforce eligible to retire in the next five years. This does not include the people who leave early for other jobs. These people must be replaced, in addition to the new people the IRS would need to hire and train.”
“We’re potentially on the cusp of major, some may even say drastic, changes to our income and estate tax system,” Compardo said. “But everything being discussed right now is merely a possibility.”
“Legislative negotiations to boost IRS enforcement activity seemed to have become more contentious ... so how the IRS will pay for the new auditors is questionable if legislation supporting increased enforcement doesn’t end up happening,” said David Shuster, a principal and international tax/director of tax controversy services in the New York offices of Friedman LLP.
“Just know that the chances of having to defend a return, and the accompanying time and expense, could become greater,” he added.