IRS Launches New Division to Target High-Earners Pass-Through Tax Liability

IRS Launches New Division to Target High-Earners Pass-Through Tax Liability. In a significant development fueled by the Inflation Reduction Act’s substantial funding injection, the Internal Revenue Service (IRS) is taking a proactive stance against tax evasion. To accomplish this, the IRS is establishing a fresh division with a primary focus on uncovering uncollected taxes concealed within companies that funnel their tax responsibility through to individual owners.

These businesses fall under the category of “pass-through entities,” encompassing limited liability partnerships, S-corporations, general partnerships, and sole proprietorships.

Integration into the Large Business and International Division

The newly instituted division will operate as part of the IRS’s Large Business and International (LBI) Division, responsible for tax collection from corporations, S-corporations, and partnerships boasting assets exceeding $10 million.

This strategic move is part of the IRS’s broader strategy aimed at restoring equity in tax compliance by diverting more attention towards high-income earners, partnerships, major corporations, and individuals exploiting the nation’s tax regulations.

An Essential Shift in Focus

Holly Paz, the head of IRS’s large business division, emphasized the significance of this transformative step: “This is an important change we will be making, and we will be working in the months ahead to efficiently and effectively transition to this new group.”

Funding Enabling the Initiative

The inception of this enforcement initiative has been made possible by an initial $80 billion boost in IRS funding, granted as part of the Inflation Reduction Act, passed by Democrats in August of the prior year. This funding allocation faced opposition from Republicans, leading to its repeal in a House bill when the GOP regained control of the lower chamber early this year.

However, this bill did not gain traction in the Democrat-dominated Senate. Notably, Republicans did succeed in reducing approximately $20 billion of the IRS funding, mainly drawn from regular appropriations rather than directly impacting the funding allocation.

Expanding IRS Workforce

Last week, the IRS announced its intention to recruit 3,700 personnel tasked with conducting audits and enforcement activities targeting partnerships, large corporations, high-income individuals, and high-wealth individuals.

This ambitious hiring initiative is propelled by the urgent need to bridge the substantial tax gap—the amount of uncollected taxes— which could be as high as $1 trillion, as stated by former IRS Commissioner Charles Rettig. This staggering figure equates to approximately 3 percent of the current national deficit, which stands at $33 trillion.

Addressing the Tax Gap

Historically, the tax gap included $130 billion in uncollected individual business income and $37 billion in uncollected corporate income tax, as conclusively measured for tax years 2014 to 2016. IRS Commissioner Danny Werfel highlighted that over the past decade, pass-through entities and affluent individuals have outmaneuvered the IRS, exploiting the agency’s dwindling resources and funding.

Werfel pointed out, “During that 10 years, it essentially enabled wealthy individuals, large partnerships, complex and large corporations to come up with increasingly creative ways of reaching their most tax-advantaged status. The issue is that in many of those cases, they took steps that are technically tax evasion under the tax law. That’s where this focus is.”