“Let’s make sure if they move, they have nowhere else to go because we’re all taxing them together.”[i]
Around the Globe
Earlier this year, the OECD observed there has been a significant increase in global wealth inequality over the last two decades. It also acknowledged that “taxation is a key instrument . . . that governments have at their disposal to address inequalities.” It added that, as “countries are looking for additional revenue sources to meet their long-term public spending needs,” it will be important to ensure “that everyone contributes their fair share,” specifically mentioning those individuals with “offshore wealth.”[ii]
Then, in March, the United Nations’ Subcommittee on Wealth Taxes published what it described as “practical guidance” on the adoption, implementation, and administration of various types of wealth taxes. It claimed that such taxes are “a vital tool to increase government revenues and reduce inequality,” especially in the aftermath of the pandemic.[iii]
Last month, four members of the G-20 group of nations[iv] proposed that a two percent wealth tax be levied on the world’s billionaires, stating that the tax proceeds would be used to “boost social justice and increase trust in the effectiveness of fiscal redistribution.”[v]
In addition to these multinational organizations, many foreign governments have separately increased, or have announced they are considering increases to, the income taxes imposed upon their wealthier residents. According to these taxing jurisdictions, such tax boosts are necessary in order to replenish national coffers, which were depleted during the pandemic, and promote social justice and equality.[vi]
Closer to Home
“Everyone contributes their fair share,” “reduce inequality,” “fiscal redistribution,” “social justice.”[vii] Catchy sound bites or something more?
Unfortunately, the rising fever for raising taxes is not limited to international organizations and foreign governments.
This is an election year in the U.S., during which many federal legislators and candidates for national office are especially susceptible to pressure from certain segments of society to support (in exchange for votes) tax increases for the “rich” in order to combat what proponents identify as economic and social inequalities.[viii]
The Budget
In a sense, the current administration’s Budget for the 2024-2025 Fiscal Year[ix] marked the start of the political campaign season with its proposals for (i) raising the top rate for the highest-income taxpayers and lowering the bracket at which the higher rates kick in, (ii) expanding the base to which the surtax on net investment income is applied, (iii) increasing the surtax rate and the additional Medicare tax rate, (iv) treating long-term capital gains and qualified dividends as ordinary income in the case of taxpayers with taxable income over a specified threshold, (v) treating lifetime gifts and transfers from a decedent as sales of property subject to income tax, (vi) imposing a minimum tax on total income (inclusive of unrealized capital gains) for all taxpayers with net wealth greater than a specified amount, (vii) taxing profits interests as ordinary income, (viii) eliminating like kind exchanges, and (ix) recapturing as ordinary income the cumulative depreciation deductions claimed with respect to real property.[x]
Even if these proposed tax increases were enacted into law,[xi] because our tax system is based on self-assessment and reporting, some taxpayers will try to reduce their obligations, or skirt them entirely, through aggressive planning or even illicit means. To ensure that such individuals – the “wealthy” figure prominently among them, according to the White House – pay their “fair share” of taxes,[xii] the IRS must be able to enforce compliance with the tax laws.
Among the substantive enforcement-related measures recently put forth by the administration are the following: (a) increasing the limitations period for the assessment of tax with respect to certain transactions, (b) imposing liability on shareholders for the unpaid income taxes of certain corporations, and (c) expanding and increasing certain penalties for noncompliance.
Inflation Reduction Act
Of course, the centerpiece of the administration’s tax compliance efforts is the Inflation Reduction Act of 2022 (the “Act”),[xiii] which provides the IRS additional funding that is dedicated to enforcing the tax return filing and tax payment obligations of the wealthiest taxpayers.
According to the White House, the goal of this legislation is to close the so-called tax gap[xiv] that the administration asserts is largely driven by income sources held by the wealthy.[xv] Closing the gap, it claims, is “critical for both fairness in the tax system and the fiscal outlook.”[xvi]
The IRS Reports
The IRS recently released an update[xvii] on its Inflation Reduction Act Strategic Operating Plan (the “SOP”),[xviii] which is basically a blueprint outlining the agency’s plans for future enforcement efforts, among other things.
The SOP
The SOP, which was released in 2023, explained that the “rising breadth and complexity of tax administration, coupled with the sophisticated ways that some taxpayers attempt to evade tax, have outpaced our resources and ability to monitor compliance and close the gap between taxes owed and collected.”
The IRS went on to state that it would improve its efforts to ensure that the proper amount of tax is paid and to promote future compliance. However, it also added that “small businesses and households earning $400,000” or less will not see audit rates increase “relative to historical levels.”
Instead, the IRS would increase its focus on “segments of taxpayers with complex issues and complex returns,” such as those related to large partnerships,[xix] large corporations, and high-income and high-wealth individuals.
Toward that end, the SOP stated that the IRS would enhance its ability to detect noncompliance, and would increase enforcement activities, among members of the above segments through the better use of improved data analytics, technology, and centralized operations, and by adding the expertise and capacity[xx] necessary to examine highly complex returns and issues[xxi] more effectively.
Interestingly, the IRS also indicated it would increase its capacity to use “high-value” whistleblower information effectively, and would reward whistleblowers fairly and as soon as possible.[xxii]
2024 Update
Last week, the IRS summarized the work under the SOP that is underway or that is planned for fiscal years 2024 and 2025, including efforts with respect to improving tax compliance and modernizing technology.
Pursuing Non-filers
In early 2024, the IRS initiated efforts to reduce the number of high-income non-filers, specifically focusing on high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017.
The new initiative with respect to non-filers involved sending out more than 25,000 compliance letters to those individual taxpayers with more than $1 million in income, and over 100,000 letters to people with incomes between $400,000 and $1 million, for the tax years between 2017 and 2021.
Adding Staff
In addition to targeting non-filers, the agency explained that it is taking action to improve compliance among high income, high wealth individuals who have failed to pay their tax liabilities. The IRS stated that it is concentrating its efforts among taxpayers with more than $1 million in income and more than $250,000 in recognized tax debt.
Toward this end, the agency is using the enforcement funding provided by the Act to hire staff in critical areas such as revenue agents, revenue officers, and tax specialists, including those dedicated to high income earners and large and complex partnerships and other passthrough entities, and it will establish a robust training curriculum for IRS staff at all grade levels.
The IRS is also hiring economists, data scientists, and tax attorneys with the specialized skills needed to support examinations of large corporations, complex partnerships, and high-income individuals.
According to the SOP update, the new, better-trained, enforcement staff will enable the IRS to significantly increase audit rates on the wealthiest taxpayers – in other words, those taxpayers with complex tax filings and high-dollar noncompliance.
Specifically, the IRS’s stated goal is to:
• Triple audit rates on corporations with assets over $250 million
• Increase audit rates by nearly ten times on partnerships with assets over $10 million
• Increase audit rates by more than 50% on wealthy individual taxpayers with total positive income over $10 million.
The agency also plans to increase enforcement of employment taxes, excise taxes, and estate and gift taxes, which it described as key areas where audit coverage has declined.
In addition, the IRS plans to increase the staffing of its collection teams,[xxiii] the Office of Appeals, and the Office of Chief Counsel.
Technology
Finally, because the types of returns on which the IRS will be concentrating going forward have become more complex over time, and are among the most time- and resource-intensive audits, the IRS is planning to expand its capabilities with respect to artificial intelligence and advanced analytics to support its enforcement and examination activities, including the identification of potential compliance risks and the selection of taxpayers for audit.
What’s Next?
The IRS has some lofty goals, but in the absence of continued funding, much of the foregoing may never bear fruit.[xxiv] In fact, earlier this month IRS Commissioner Werfel told the House Appropriations Committee that the funds already provided by the Act to enable to agency to hire more staff and improve its technology base will soon be gone.
“Our ongoing success hinges on sustained investments to make sure that we have the right size workforce with the right training and tools,” the Commissioner said.
Because the higher value returns are so complex, the IRS has explained, they are worked by teams of IRS personnel and take hundreds of hours to complete. Without the appropriate funding, the IRS warns that a higher share of audits will fall on the tax returns of low- and middle-income taxpayers, which are likely to be relatively simple, while examination coverage for high-income and large business taxpayers will decline.
Like so many other tax matters that are currently being examined,[xxv] the IRS’s ability to pursue and collect the taxes owed by bad actors will likely be determined by the results of the November elections.
Stay tuned.
The opinions expressed herein are solely those of the author(s) and do not necessarily represent the views of the Firm.
[i] Washington State Sen. Noel Frame (D). https://news.bloombergtax.com/daily-tax-report-state/tax-the-rich-blue-states-want-to-leave-wealthy-nowhere-to-hide .
That aside, please forgive my alluding to the Communist Manifesto’s “Workers of the World Unite,” in the title of today’s post, though it is appropriately followed by a quote of an elected official from the People’s Republic of Washington.
[ii] https://www.oecd.org/tax/oecd-secretary-general-tax-report-g20-finance-ministers-brazil-february-2024.pdf .
[iii] https://financing.desa.un.org/sites/default/files/2024-03/CRP.%202%20Appendix%20A.pdf .
[iv] Brazil, Germany, Spain, and South Africa; however, France has also stated it is prepared to endorse a global minimum tax on the wealthy. Think of it as a Pillar Two for individuals.
[v] https://www.wsj.com/articles/watch-out-for-a-global-wealth-tax-biden-yellen-g20-edad11a2 .
[vi] Whatever that means. Hopefully, this is nothing more than a catchphrase for some indeterminate and purportedly beneficial outcome, one that is used by elected officials to justify whatever spending programs they believe will keep them in power and enable them to mold society according to their twisted vision.
[vii] As Marx wrote in his Critique of the Gotha Programme, “From each according to his ability, to each according to his needs.” Is there a theme emerging here?
[viii] Where is the cutoff for the rich? At the end of 2012, Obama drew the line at $400,000. With a cumulative price index of 36% since 2012, that would translate into $544,000 today. Yet Biden and his have refused to redraw that line, even as cumulative inflation during his short tenure has exceeded 21%. In any case, neither figure accounts for differences in regional economies – the cost of living in Manhattan is significantly greater than any other part of the country. In other words, a family making $400,000 in Manhattan has more challenging financial scenario than one in Denver or Dallas, for example.
Among the folks in the administration who are, presumably, involved in drawing the lines, is the Chair of the Council of Economic Advisers, who holds a bachelor’s degree in music and a master’s degree in social work. Just perfect.
[ix] Mind you, Congress has not yet passed a budget for the current fiscal year, which ends September 30, 2024.
[x] https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf . These are just some of the items in the administration’s plan for taxing income/wealth. For example, there are others that focus on transfers at death.
[xi] Which is not preordained.
[xii] To put this into perspective, the Tax Foundation determined that the top 1 percent of taxpayers (AGI of $682,577 and above) paid income tax at an average rate nearly eight times the rate faced by the bottom half of taxpayers; what’s more, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2024/#:~:text=High%2DIncome%20Taxpayers%20Paid%20the%20Majority%20of%20Federal%20Income%20Taxes,of%20all%20federal%20income%20taxes.
[xiii] P.L. 117-169.
[xiv] Basically, the difference between estimated ‘true’ tax liability for a given period and the amount of tax that is paid on time. The IRS estimates that the tax gap is $683 billion.
[xv] The uncollected revenues represented by the gap could be allocated towards “any number of spending priorities.” I shudder to think. https://www.whitehouse.gov/cea/written-materials/2024/02/08/empowering-the-irs-understanding-the-full-potential-of-the-inflation-reduction-acts-historic-investment-in-the-internal-revenue-service/#:~:text=Even%20after%20accounting%20for%20IRS’s,by%20the%20wealthiest%20tax%20evaders.
[xvi] At the end of 2023, the national debt was greater than the gross domestic product. For the FYTD 2024, 13% of the federal government’s expenditures has been for interest on the debt (the same amount as spent for national defense).
[xvii] https://www.irs.gov/pub/irs-pdf/p3744b.pdf .
[xviii] https://www.irs.gov/pub/irs-pdf/p3744.pdf .
[xix] Partnership have a special place at the IRS. According to the SOP, the number of partnerships increased by 32% in just a decade, and those with assets exceeding $5 million grew by 75%.
[xx] According to the SOP, the IRS will “[a]ttract, retain and empower a highly skilled, diverse workforce.” Enough.
[xxi] Including digital assets, listed transactions, and certain international issues.
[xxii] As part of this effort, the IRS stated it would keep whistleblowers informed of their claims’ status and the basis for IRS decisions on claims, and strengthen its collaboration with “stakeholders in the Whistleblower Program.” Query the extent to which the IRS will go to encourage insiders to come forward. There are slippery slopes here.
[xxiii] Collections, of course, collects delinquent taxes but also secures delinquent tax returns.
[xxiv] You’ll recall that $20 billion of the $80 billion of funding originally provided by the Act was slashed as part of last year’s budget deal. `
[xxv] For example, the upcoming expiration of much of the TCJA, P.L. 115-97.
