Top IRS Enforcement Targets for 2021
The IRS issues an annual press release of its latest enforcement priorities. However, taxpayers can glean IRS compliance enforcement interest areas based on many IRS statements and studies over the past few years.
IRS compliance enforcement targets
With many new IRS personnel on the job, the IRS will focus their compliance resources on resolving big compliance problems. Here are 7 targets the IRS may pursue in 2021:
#1: Small business taxpayers
The big problem for the IRS: Tax gap studies show that taxpayers who do not receive information returns (W-2s, 1099s) and must voluntarily report their income and deductions are the biggest contributors to noncompliance. In fact, according to IRS studies, for tax years 2011-2013 Small Business Owners (Schedule C filers, that include gig workers and realtors) were the biggest culprits and misreport their income by 56%. Unreported tax on small business income for individuals was estimated to be $110 billion a year for the same period.
IRS compliance efforts: Enforcing compliance on small businesses is costly for the IRS. However, the IRS recently hired and on-boarded hundreds of new field auditors (called revenue agents). These new revenue agents may be training on audits of small businesses.
#2: Crypto-currency holders
The big problem for the IRS: There is no audit trail on crypto-currency and the IRS knows that means noncompliance. Like small business owners, the IRS knows where there is no virtual currency information reporting (i.e. W-2s, 1099s) and the potential for large gains, there is a high likelihood of noncompliance.
IRS compliance efforts: The IRS first issued guidance on the tax treatment of virtual currency in 2014. In 2016, the IRS requested authorization to issue a John Doe summons on a virtual currency exchange platform in order to obtain certain records of taxpayer who used virtual currency and, in July 2019, the IRS began issuing letters to taxpayers that may have failed to report income resulting from virtual currency. These efforts were just the beginning. In 2021, the IRS requested authorization to issue John Doe summonses on two additional crypto currency exchange platforms, and the IRS promises more compliance efforts this year, including several criminal prosecutions for taxpayers who have intentionally not reported virtual currency gains on past returns.
#3: Employers with unpaid payroll taxes
The big problem for the IRS: 72% of all revenue collected in the US tax system comes from withheld payroll taxes. When employers don’t pay their payroll taxes, the US Treasury takes a double hit. First, the IRS does not get withheld income and social security taxes. Second, the employer may have also claimed a credit for the unpaid withholding. The IRS views employer collection and nonpayment of employees’ withholdings (called “trust fund” taxes) as a very serious offense.The number of revenue officers who investigate unpaid payroll taxes has decreased by 47% from 2010 to 2018 and so has enforcement of this IRS collection priority.
IRS compliance efforts: The IRS is diligently onboarding more field collection resources (revenue officers). Egregious actors who have multiple incidents of unpaid payroll taxes with different entities (called “pyramiding”) face IRS criminal investigation.
#4: Certain nonfilers
The big problem for the IRS: The IRS claims that for years 2011 through 2013, nonfilers only represent $39 billion in lost revenue annually to the US Treasury. Many tax experts disagree with this estimate. The big problem with nonfilers is that they leave the tax system for good. Also, IRS tolerance of nonfilers erodes the integrity of the voluntary compliance system.
IRS compliance efforts: The IRS has been criticized for not chasing two groups of nonfilers: high income nonfilers (especially those without withholding) and taxpayers who do not file a return after they have requested an extension of time to file. The IRS announced a new non-filer enforcement initiative in 2020 as well as hired more field resources to chase nonfilers. In the future, we may see the IRS pursue the more egregious nonfilers.
#5: High tax debtors
The big problem for the IRS: From 2010 to 2018, the IRS lost almost half of its field collection personnel (revenue officers). Many high tax debt taxpayers were put on hold because the IRS simply did not have the resources to chase them.
IRS compliance efforts: In 2019, the IRS significantly increased the number of its field collection personnel (revenue officers). The marching orders for these new revenue officers were to let tax debtors know that they exist. In 2021, these ROs will be contacting more higher debt taxpayers and repeat file/owe taxpayers to get them back into compliance.
#6: High-income taxpayers
The big problem for the IRS: The IRS was criticized for auditing low income taxpayers at the same rate as higher income taxpayers (income of $1 million or more). In response, Treasury and the IRS said it would like to audit more higher-wealth taxpayers in the future.
IRS compliance efforts: More IRS revenue agents will mean more audits on higher wealth taxpayers. Especially taxpayers who enter into certain transactions like conservation easements or hold interests in foreign financial accounts and entities. In the past, high-income taxpayers have experienced audit rates as high as 12% (2011). In 2018, the audit rate of high wealth taxpayers was 3.2%. Expect more high income audits and good returns on investment as the average amount owed on a high income audit in 2018 was $115,259.
#7: Taxpayers with refundable credits
The big problem for the IRS: It is estimated that 24% of all earned income tax credit payments – over $16 billion a year – are erroneous.
IRS compliance efforts: EITC and additional child tax credit refund hold audits continue to be an IRS audit target. These are easy IRS audits as they are done by mail and taxpayers rarely contest the IRS’s findings. Subsequently, the IRS was under scrutiny for using their limited audit resources on lower-income taxpayers who claimed EITC. However, the IRS is still focused on reducing the 24% error rate and IRS mail audit resources will continue to flag and audit these returns in the future.
The Target: all taxpayers with notices
Since 2001, the IRS has understood that the most cost-effective manner to enforce compliance is to let taxpayers know that they are there after they file. The IRS cannot audit or enforce collection on all taxpayers, but they can let the taxpayer know that they may be subject to further scrutiny by sending them a notice. In 2018, the IRS sent over 219 million notices to taxpayers.
The compliance by notice strategy is here to stay. It lets all taxpayers know that the IRS is still there, even though they may not be a target in 2021. For assistance creating a strategy to address your tax issues, contact our office to find out about various ways we can help you.