The U.S. Internal Revenue Service (IRS) is gearing up, thanks to a massive funding influx via the Inflation Reduction Act. This move aims to chase down taxes that big earners have stashed in businesses that, in turn, direct their tax bills to individual proprietors.
Commonly, these businesses are dubbed “pass-through entities”. Their legal tags range from limited liability partnerships and S-corporations to general partnerships and sole proprietorships.
Details of the New Division IRS Tax Law
This spanking-new division finds its home within the IRS’s Large Business and International (LBI) Division. For the uninitiated, this section focuses on pulling in taxes from corporations, S-corps, and partnerships that boast assets soaring over $10 million.
The IRS spilled the beans on a recent Wednesday, stating that this initiative is an attempt “to bring back the balance in tax adherence by zooming in on top-earning individuals, partnerships, and big corporations that might be bending the tax rules a bit too much.”
“Our game plan is about to see a major shift, and we’re all hands on deck to make this change smooth,” voiced Holly Paz, the head honcho of IRS large businesses, in her statement.
The trigger behind this aggressive enforcement? A whopping $80 billion injection into the IRS’s veins, thanks to the Democrats’ Inflation Reduction Act from the previous summer.
However, it’s not all cheers. The Republicans, not exactly thrilled about this cash injection, tried pulling the plug in a House bill once they clinched majority there. But, it faced a brick wall in the Senate, which had a Democrat majority.
That said, the Republicans did manage a small win. They peeled away about $20 billion from this funding in a verbal pact with the Democrats. This move was primarily to dodge a looming government debt catastrophe. And here’s the twist: instead of chopping it off the top, it’s getting sliced from the regular budget allocation for the IRS.
IRS’s Hiring Spree
Just last week, IRS threw out an interesting number: 3,700. That’s the headcount they’re bringing onboard to spearhead audits and ensure that partnerships, big corporate giants, and the affluent toe the line.
Missed tax collections is a gigantic pain point for the government. Termed the “tax gap”, this gaping hole amounts to a few hundred billion dollars annually. For context, Charles Rettig, an ex-IRS Commissioner, once told Congress that this number could skyrocket to an eye-watering $1 trillion. To give that number a bit more weight, it’s around 3% of the staggering national deficit of $33 trillion.
Delving into history, between 2014 and 2016, this tax chasm included $130 billion of ungrabbed individual business taxes and another $37 billion of corporate tax.
Recently, IRS Commissioner Danny Werfel had a chat with reporters. He lamented about the last ten years, a period when deep-pocketed individuals and pass-through businesses seemingly had an upper hand against the IRS, given its dwindling resources.
“To put it bluntly, they’ve outsmarted us for a decade. They’ve hatched crafty methods to minimize their tax bills. Problem is, many times, they’ve stepped over the line, making it outright tax evasion. And that’s our prime target,” he emphasized.