According to the head of the Internal Revenue Service, the nation’s millionaires and billionaires are avoiding over $150 billion in taxes annually, exacerbating government deficits and undermining the fairness of the tax system. With a substantial increase in funding from Congress, the IRS has initiated a comprehensive crackdown on affluent individuals, partnerships, and large corporations.
In an exclusive interview with CNBC, IRS Commissioner Danny Werfel disclosed that the agency has implemented numerous initiatives aimed at identifying tax evasion among taxpayers with complex returns, ensuring that every taxpayer contributes their rightful share. “When I look at what we call our tax gap, which is the amount of money owed versus what is paid for, millionaires and billionaires that either don’t file or [are] underreporting their income, that’s $150 billion of our tax gap,” Werfel stated.
“There is plenty of work to be done,” Werfel emphasized that years of insufficient funding have deprived the IRS of the personnel, technology, and resources necessary to conduct audits, particularly on intricate and sophisticated returns that demand more resources. IRS statistics reveal that audits of taxpayers earning over $1 million annually have plummeted by over 80% in the past decade, despite a 50% increase in the number of taxpayers in that income bracket.
“For complex filings, it became increasingly difficult for us to determine what the balance due was,” Werfel noted. “So to ensure fairness, we have to make investments to make sure that whether you’re a complicated filer who can afford to hire an army of lawyers and accountants or a more simple filer who has one income and takes the standard deduction, the IRS is equally able to determine what’s owed. And to us, that’s a fairer system.”
However, some Republicans in Congress have intensified their criticism of the IRS and its expanded enforcement efforts. They argue that the surge in audits will burden small businesses with unnecessary bureaucracy and years of unproductive investigations while failing to generate the anticipated revenue.
Although the Inflation Reduction Act provided the IRS with an $80 billion boost, congressional Republicans negotiated to reclaim $20 billion of the funding last year, and they are now advocating for further reductions.
The Treasury Department recently estimated that increased IRS enforcement will yield an additional $561 billion in tax revenue between 2024 and 2034, surpassing its initial projection. The IRS asserts that for every additional dollar allocated to enforcement, the agency generates approximately $6 in revenue.
The IRS is highlighting its early achievements through a program aimed at recovering unpaid taxes from millionaires. The agency has identified 1,600 millionaire taxpayers who owe at least $250,000 each in assessed taxes. To date, the IRS has recovered over $480 million from this group, with ongoing efforts underway.
On Wednesday, the IRS unveiled a program targeting owners of private jets, suspected of utilizing their aircraft for personal use without properly reporting it for tax purposes. Commissioner Werfel disclosed that the agency has begun leveraging public databases of private jet flights and advanced analytics tools to pinpoint tax returns with the highest likelihood of evasion.
This initiative entails launching numerous audits on companies and partnerships that own jets, with potential cascading audits targeting affluent individuals. Werfel underscored that for certain companies and owners, the tax deductions associated with corporate jets could reach staggering sums, amounting to “tens of millions of dollars.”
Limited partnerships emerged as another area ripe for potential tax evasion, Werfel noted, highlighting that numerous affluent individuals have been channeling their income through such business entities to evade income taxes. “What we started to see was that certain taxpayers were claiming limited partnerships when it wasn’t fair,” he remarked.
“They were basically shielding their income under the guise of a limited partnership.” To address this issue, the IRS has initiated the Large Partnership Compliance program, scrutinizing some of the largest and most intricate partnership returns. Werfel revealed that the IRS has already commenced examinations of 76 partnerships, encompassing hedge funds, real estate investment partnerships, and prominent law firms.
Moreover, the agency has integrated artificial intelligence into various programs, including the aforementioned initiative, to enhance its ability to identify returns likely to contain evasion or errors. Beyond uncovering evasion, AI aids in steering clear of audits for taxpayers who adhere to the rules.
“Imagine all the audits are laid out before us on a table,” Werfel illustrated. “What AI does is it allows us to put on night vision goggles. What those night vision goggles allow us to do is be more precise in figuring out where the high risk [of evasion] is and where the low risk is, and that benefits everyone.”
