IRS Could Get Significant Boost in Enforcement Resources in 2021

In May 2021, the U.S. Treasury Department released its American Families Plan Tax Compliance Agenda (the “Agenda”). The Agenda includes numerous proposals, including several that would significantly enhance the IRS’ enforcement tools and resources in 2021 and beyond. Here US International Tax Advisors discusses some of the key proposals of which taxpayers should be aware.

IRS Workforce to More Than Double Over the Next Decade

As Reuters reports, the Treasury Department’s proposal calls for the IRS’ workforce to more than double over the next decade—adding, “a total of more than 86,000 full-time equivalent employees to the agency's ranks over the next decade, reversing a long-term decline and more than doubling the 2019 IRS workforce of 73,554 full-time equivalent positions.” As discussed below, a significant portion of the IRS’ new workforce would be devoted to auditing and enforcing taxpayer compliance.

Machine-Learning-Capable Systems to Assist with Detecting Tax Fraud

The proposal also calls for an overhaul of the IRS’ computer systems. As explained in the Agenda, “[a]dditional IT tools will help support a staff capable of deploying new analytical techniques; investing in developing machine learning capabilities will enable the IRS to leverage the information it collects to better identify tax returns for compliance review.” The IRS uses some of these tools already, but its systems currently lag behind those of other top federal enforcement agencies.

Enhanced Resources Would Mean More Audits to Close the “Tax Gap”

With its additional personnel and updated IT systems, the IRS will be tasked with significantly increasing the number of audits it conducts each year. The proposal calls for IRS audits to play a central role in closing the “tax gap” (currently estimated to be as high as $1 trillion per year) over the next decade. If adopted, the Treasury Department’s proposal would not only give the IRS the tools it needs to identify suspect returns more efficiently and on a more consistent basis, but it would also endow the agency with the personnel it needs to potentially conduct millions of audits per year.

All Cryptocurrency Transactions Over $10,000 May Need to Be Reported

Separately, the Agenda recommends extending the reporting requirements that currently apply to cash transactions of $10,000 or more to cryptocurrency transactions exceeding the same threshold. This would contribute significantly to the IRS’ efforts to enforce cryptocurrency investors’ tax obligations, as it would allow the IRS to rely on reports filed by law firms, brokers, and other entities that facilitate large cryptocurrency transactions to identify taxpayers who fail to meet their own reporting obligations.

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