The IRS, bolstered by substantial new funding from the Inflation Reduction Act, is establishing a fresh division aimed at pursuing unpaid taxes concealed within pass-through companies that transfer their tax responsibilities to individual owners. Such enterprises, often referred to as “pass-through entities,” typically adopt legal designations like limited liability partnerships, S-corporations, general partnerships, and sole proprietorships.
This newly formed division will be housed within the IRS’s Large Business and International (LBI) Division, responsible for tax collection from corporations, S-corps, and partnerships with assets exceeding $10 million. In a statement released on a Wednesday, the IRS revealed that this initiative is part of its strategy “to reinstate equity in tax compliance by placing more emphasis on high-income earners, partnerships, major corporations, and those exploiting the nation’s tax laws.”
IRS Enforcement Drive Targets Tax Gap and Innovative Tax Evasion Strategies
Holly Paz, the head of the IRS Large Business Division, emphasized the significance of this change, stating, “This is a significant adjustment we are enacting, and in the forthcoming months, we will work to smoothly transition to this new unit.” This enforcement drive has been made possible by an initial $80 billion increase in IRS funding under the Democrats’ Inflation Reduction Act, passed the previous August.
Republicans opposed this boost in IRS funding, moving to repeal it in a House bill when they regained control of the lower chamber at the start of the year. However, this bill did not gain traction in the Democrat-controlled Senate.
Republicans did manage to trim approximately $20 billion from the funding as part of an informal agreement with Democrats to prevent a government debt default during the summer. Most of the $20 billion reduction would come from the IRS’s regular appropriations rather than directly from the funding allocation.
Last week, the IRS announced its intention to recruit 3,700 staff members for the purpose of conducting audits and enforcement activities related to “partnerships, major corporations, high-income individuals, and individuals with significant wealth.”
The government consistently falls short in collecting hundreds of billions of dollars in owed taxes each year, a phenomenon known as the “tax gap.” Former IRS Commissioner Charles Rettig informed Congress last year that this figure could be as high as $1 trillion, roughly 3% of the current national deficit, which stands at $33 trillion.
The last time the tax gap was definitively measured for tax years 2014 to 2016, it included $130 billion in uncollected income from individual businesses and $37 billion in uncollected corporate income tax.
IRS Commissioner Danny Werfel noted in a recent press briefing that over the past decade, pass-through entities and affluent individuals have outwitted the IRS as the agency’s resources and funding have diminished. He emphasized that during this period, wealthy individuals, large partnerships, and major corporations had devised increasingly innovative strategies to secure their most tax-advantageous positions, often resorting to actions that technically amounted to tax evasion under the tax law. This is where the IRS’s current focus lies.