Prepared by Arturo Meza, Foreign Associate at Klug Counsel
On August 16, 2022, President Biden signed the Inflation Reduction Act into law. As part of the significant changes made by this legislation, the IRS will receive a budget increase of nearly $80 billion over the next ten years to improve four areas: enforcement, operations support, business system modernization, and taxpayer services.
During a tax conference held last month in Washington DC, Nikole Flax, a member of the IRS Large Business and International Division (LB&I) stated that the division is developing the operating plan for putting to use the $80 billion and has been working to expand some of the enforcement workstreams that they know are much lower than they should be. Those workstreams include large partnerships, high-income/high-wealth taxpayers, and corporate coverage.
The LB&I is responsible for tax administration activities for domestic and foreign businesses with a US tax reporting requirement and assets equal to or exceeding $10 million as well as the Global High Wealth and International Individual Compliance programs. The LB&I focuses on Cross Border Activities, Pass-through Entities, and Treaty & Transfer Pricing Operations Practice Areas.
According to data from the US Department of the Treasury, there is a $600 billion annual “tax gap” between what’s owed and collected, which may amount to roughly $7 trillion in lost tax revenue over the next decade1.
To reduce that gap, the IRS will use part of the $80 billion in funding to increase audits of the wealthy. Commissioner Flex stated, “[e]nforcement funding, obviously, is a big portion of the $80 billion”.
During the fiscal year 2021, the IRS revenue agents and tax examiners audited 13,725 taxpayers reporting $1 million or more in positive income. This was up from the abysmally small numbers audited during the fiscal year 2020 (11,331), but still slightly below how many millionaire returns were audited during the fiscal year 2019 (13,970)2.
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[1] https://home.treasury.gov/news/featured-stories/the-case-for-a-robust-attack-on-the-tax-gap
[2] https://trac.syr.edu/tracirs/latest/679/
Arturo Meza is a Mexican licensed attorney with more than 10 years of experience and extensive practice in cross-border transactions between Mexico and the United States. He is currently a Foreign Associate at Klug Counsel. Klug Counsel represents companies, start-ups, private equity funds, family offices, and high-net-worth individuals. Through their strategic partnerships with law firms and other professional service firms in the U.S. and around the world, they are able to meet the tax and business needs of their clients in the U.S. and internationally.