23 May 2024

On Thursday (05/02), the Internal Revenue Service (IRS) published the update of its Strategic Operating Plan, initially released last April. The new update outlines future improvements in services and technology for taxpayers and tax professionals, while increasing audit rates for large partnerships, big corporations, and the wealthy.

In addition, the Treasure and IRS also released a report about how much they accomplished under the plan last year using funds from the Inflation Reduction Act, demonstrating, among other things, the IRS recovery of $520 million in its efforts to pursue high-income, high-wealth individuals who failed to file their taxes or pay recognized tax debts.

2024-25 Plans:

The Internal Revenue Service (IRS) has outlined five main objectives for the upcoming years. These objectives are aimed at addressing various areas, including the acceleration of the resolution of taxpayers’ issues and the expansion of the IRS human capital. Additionally, the IRS is committed to increasing its investment in the adoption of new technologies and other tools. These investments are expected to enhance the analysis of corporate returns and improve audit procedures.
The first new IRS objective that taxpayers should pay attention is the Focus expanded enforcement on taxpayers with complex tax filings and high-dollar noncompliance to address the tax gap.

The IRS has outlined specific priorities to achieve its objectives. These priorities include the strategic hiring of critical staffing areas such as revenue agents, revenue officers, and tax specialists. These roles will be focused on addressing the issues of higher income taxpayers. Additionally, the IRS plans to implement new alternative interventions, starting in the 2024 fiscal year. These interventions will include the use of soft notices to alert taxpayers, particularly partnerships, about balance sheet discrepancies. By the end of the fiscal year, the IRS aims to continue the scrutiny of 76 of the largest partnerships in the U.S., demonstrating a particular interest in this category of taxpayers.
Another highlight is the major emphasis on modernization of IT systems defined as to deliver cutting-edge technology, data, and analytics to operate more effectively.

The IRS is implementing the use of bots to automate high-volume tasks that were previously performed manually, with the aim of reducing the workload of its agents. Concurrently, the IRS plans to modernize the Business Master File (BMF) database and integrate the use of AI systems, advanced analytics, and statistical methods into its operations. These advancements are intended to identify noncompliance risks and improve case selections within the IRS. Additionally, the IRS will make substantial investments through Inflation Reduction Act (IRA) funding to modernize its IT infrastructure and expand data analytics capabilities. These investments will lay the foundation for the proposed change.

The Future

The proposal for 2025 is to restore and extend investment until 2034, in order to avoid financing cliffs, providing US$104 billion to the IRS over the nearly 10-year budget window, estimated to generate at least an additional $341 billion dollars in revenue. According to IRS Commissioner Danny Werfel, “Across the IRS, we’ve made fundamental changes that have improved taxpayer services.” On an interview for Accounting Today, Werfel also said that “The IRS will continue focusing on making improvements and efficient use of funding. We highlight accomplishments rather than taking a victory lap because more work remains. But to stress the importance of continuing this momentum, the IRS will continue working to make a difference for the nation’s taxpayers. At the same time, it’s critical that the IRS has stable, secure funding to allow technology modernization and taxpayer service improvements to continue into the future.”

In addition, the report highlights the IRS’s plan to boosts audits on big corporations and large, complex partnerships for tax year 2026. The IRS aims to nearly triple the audit rates on large corporations with assets over $250 million to 22.6% in tax year 2026. Additionally, audit rates on large, complex partnerships with assets over $10 million will increase from 0.1% in 2019 to 1% in 2026. It’s important to note that the IRS emphasizes that it will not increase audit rates for small businesses and taxpayers making under $400,000, and those rates will remain at historically low levels. On the other hand, the IRS assures that audit rates for small businesses should not increase, maintaining them at a historically low level.

What does that mean for taxpayers?

In light of the new objectives announced by the IRS for the upcoming years, there is an anticipated rise in IRS notifications and audits for complex filers, driven by the integration of automated solutions and AI-powered tools. Big corporations and complex partnerships should work closely with their tax professionals to ensure their compliance with IRS expectations.

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