Update on IRS Enforcement Efforts
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We frequently post about the Internal Revenue Service's (IRS) tax enforcement trends and announcements. Prior examples from this year include the release of a five-year strategic plan emphasizing enforcement, the plan to hire up to 200 additional attorneys to assist with litigation efforts, the implementation of the Large Partnership Compliance (LPC) Pilot Program, a focus on tax compliance of non-US citizens and residents, and the creation of a new Joint Strategic Emerging Issues Team to identify emerging "abusive transactions." Over the past several weeks, the IRS has provided additional updates on its enforcement efforts and future plans, including the following:
- The IRS is considering raising the economic substance doctrine more frequently in transfer pricing examinations—even those where taxpayers have transfer pricing documentation—and asserting penalties more often in transfer pricing cases. This follows the announcement last April that executive approval is no longer needed before asserting the codified economic substance doctrine under Internal Revenue Code Section 7701(o).
- The IRS plans to grow the LPC program and envisions it functioning similar to corporate examinations conducted by the Large Business & International Division.
- The IRS's Criminal Investigation (CI) Division is highly focused on criminal digital asset cases and intends to make many of these cases public. This follows the recent release of the CI Division's annual report.
- The IRS intends to expend more resources on examinations of high-income/high-net-worth taxpayers.
- The IRS has proposed to require the disclosure of more information regarding corporate taxpayers' uncertain tax positions, including citations to contrary authorities, which, if finalized, will likely lead to more examinations and challenges to tax reporting positions.
Practice Point: Tax enforcement has been down over the past several years, including a slowdown in audit operations during the COVID-19 pandemic. With increased funding from the Inflation Reduction Act of 2022 and proposed restrictions on access to IRS Appeals for certain matters, we expect more examinations and tax disputes in the near future. Taxpayers and their advisors should prepare. Consider working with your tax controversy advisor to discuss your more vulnerable return positions to see how to better defend against the impending tax enforcement wave!
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