On September 8, 2023, the IRS announced a “sweeping effort” to target America’s wealthiest taxpayers. IRS Commissioner Daniel Werfel described enforcement actions, which will be funded by the Inflation Reduction Act of 2022 and will include the scrutiny of returns filed by 75 partnerships with over $10 billion in assets; 500 partnerships with over $10 million in assets; and 1,600 individual millionaires.
The IRS is using updated technology, including Artificial Intelligence (AI), to identify which tax returns to examine. This technology is “the result of groundbreaking collaboration among experts in data science and tax enforcement.” According to Commissioner Werfel, “[n]ew tools are helping us see patterns and trends that we could not see before and, as a result, we have higher confidence on where to look and find where large partnerships are shielding income.” Until now, the IRS “has simply not had the resources or staffing to address partnerships; in a real sense, we’ve been overwhelmed in this area for years.” Inflation Reduction Act funds are supplying those resources and staffing.
The IRS continued this drumbeat on September 20, 2023, with its announcement of plans “to establish a special area to focus on large or complex pass-through entities.” This new area will fall within the IRS Large Business & International operating division and will be staffed in part with new employees hired to focus on “complex partnerships, large corporations, and high-income and high-wealth individuals.”
Commissioner Werfel explained that developing this new team “is another part of our effort to ensure the IRS holds the nation’s wealthiest filers accountable to pay the full amount of what they owe. … We are honing-in on areas where we believe non-compliance among our wealthiest filers has proliferated over the last decade of IRS budget cuts, and pass-throughs are high on our list of concerns. This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe. These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities, while making sure middle- and low-income filers continue to see no change in audit rates for years to come.” The IRS efforts are designed to reverse what Commissioner Werfel described as, “years of underfunding” that has “led to the lowest audit rate of wealthy filers in our history.”
That low audit rate is indeed rising in connection with three categories of wealthy taxpayers:
Over the past 75 years, Kostelanetz LLP has built a global reputation as a law firm of choice for clients facing high-stakes controversies and negotiations with government agencies.
Our attorneys include a former Acting Assistant Attorney General of the Department of Justice (DOJ) Tax Division, immediate past Chief of the IRS Criminal Investigation Division, former DOJ Tax Division trial and appellate attorneys, and others with significant government experience. As a result, Kostelanetz LLP attorneys are particularly well positioned to represent taxpayers that find themselves subject to these heightened enforcement efforts and are regularly called upon to handle the most challenging and sensitive cases and internal investigations.
Earlier this year, Chambers recognized Kostelanetz as a leader in Tax: Controversy (Nationwide), Tax: Fraud (Nationwide), White-Collar Crime and Government Investigations (New York), and Tax (New York and District of Columbia). Regarding the firm’s tax-related work, Kostelanetz clients told Chambers that “The firm has a deep bench of highly trained and sophisticated attorneys,” “the team is stellar, knowledgeable, and experienced,” and “Kostelanetz attorneys are conscientious, intelligent and responsive.” The firm also has been recognized by U.S. News—Best Lawyers®, identified as a Tier 1 firm for Litigation and Controversy – Tax (Nationwide, New York, and District of Columbia), Criminal Defense: White-Collar (Nationwide, New York, and District of Columbia), Tax Law (Nationwide, New York, and District of Columbia), and Commercial Litigation (New York) in 2023. Kostelanetz LLP was named Litigation and Controversy – Tax “Law Firm of the Year” in 2022 and 2021 by U.S. News – Best Lawyers® “Best Law Firms.”