IRS Enforcement Revival: Could the Long Decline in Criminal and Fraud Enforcement Activity be Coming to an End?
In his April 28, 2021 address, President Biden asked Congress to provide $80 billion of extra funding for the Internal Revenue Service (“IRS”) over the next decade.1 While the timing and amount of any additional funding are uncertain, there appears to be general agreement that increased funding of IRS enforcement efforts is critical to reverse the steady decline of audits, criminal investigations and prosecutions over the last decade.2 The IRS is not waiting for additional funds to ramp up its fraud and criminal enforcement activities, however, having recently established new units focused on these efforts.
Many would be shocked at the extent of the decline in IRS enforcement activities. According to a Congressional Budget Office (“CBO”) report from July 2020, the number of individual and corporate income tax returns examined by the IRS from 2010-2018 dropped by 46% and 37%, respectively.3 For several years the IRS has been auditing less than 1% of all returns. Overall IRS staffing dropped by 22% during 2010-2018, with an even greater decline of 31% in enforcement personnel.4 Some of this decline in enforcement activity can be attributed to budgetary constraints. Indeed, the CBO notes that “[a]ppropriations for the IRS fell by about 20 percent (adjusted for inflation) between 2010 and 2019.”5 Tax-related prosecutions declined by 53% in the five years ending February 2020 while tax-related convictions dropped 66%, according to a Syracuse University study.6 Resources for enforcement have had to compete with other priorities, such as implementing the Tax Cuts and Jobs Act of 2017 (“TCJA”) and issuing guidance under the TCJA, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and other COVID-19 Pandemic relief measures.
But while additional funding would help, the IRS has not been sitting still. Recognizing the importance of targeted enforcement activities to the viability of our self-assessment tax system, the IRS has focused its resources on several key areas. For example, often in close coordination with the Department of Justice (“DOJ”), the agency has prioritized pursuing high-income individuals who have not filed tax returns, taxpayers who have maintained foreign bank accounts but failed to report them, payroll tax fraud, and various tax shelter transactions the IRS regards as abusive, such as certain syndicated conservation easements and captive insurance arrangements.7 As successful as some of these initiatives have been, however, focusing on relatively few areas means that the agency is behind the curve in developing enforcement programs for a variety of emerging areas, like virtual currency issues and money laundering.
Several recent organizational changes also show the IRS is not just waiting for Congress to act. In March 2020, the agency announced the creation of a Fraud Enforcement Office. Damon Rowe, formerly in the IRS’s Criminal Investigation Division (“CI”), is the Executive Director of the office, which is housed within the IRS’s Small Business / Self-Employed Division (“SB/SE”). The mission of the new office is to “detect and deter fraud while strengthening the National Fraud Program.”8
And, in April 2021, the IRS announced the creation of the Office of Promoter Investigations (“OPI”) in an effort to strengthen the agency’s scrutiny of abusive tax avoidance practices. Led by a twenty-year veteran of the agency, Lois Dietrich, the OPI will also sit within the SB/SE but will work across the entire agency to focus on practices the IRS regards as abusive. IRS Commissioner Chuck Rettig stated that the OPI “will coordinate efforts across multiple business divisions to address abusive syndicated conservation easements and abusive micro-captive insurance arrangements, as well as other transactions.”9
The activities of the Fraud Enforcement Office and the OPI will likely complement work done by CI, which investigates a wide range of criminal activity, including tax fraud, money laundering, and violations of the Foreign Corrupt Practices Act. CI refers its cases to the DOJ for potential prosecution.
So what should taxpayers expect? Increasing the IRS’s enforcement budget is a Biden administration priority, and given the need for tax revenue to fund deficits and reports about a growing “tax gap,” it seems like a safe bet that Congress will provide additional funding. But there will undoubtedly be a lag between new funding and significant increases in audit rates. In the meantime, practitioners should watch the activities of the Office of Fraud Enforcement and the OPI.
1 Richard Rubin, Biden to Seek $80 Billion to Bolster IRS, Tax Enforcement, The Wall Street Journal (Apr. 27, 2021, 7:23 PM), https://www.wsj.com/articles/biden-to-seek-80-billion-to-bolster-irs-tax-enforcement-11619539465?mod=searchresults_pos9&page=1.
2 See Cong. Budget Off., Trends in the Internal Revenue Service’s Funding and Enforcement (July 2020), https://www.cbo.gov/system/files/2020-07/56422-CBO-IRS-enforcement.pdf.
3 Id. at 2.
4 Id. at 11.
5 Id. at 8.
6 Frederic Lee, Tax Prosecutions Up and Convictions Down in February, 171 Tax Notes Fed., 509, 509 (2021).
7 Internal Revenue Serv., Pub. 5382, Catalog No. 73535Y, Internal Revenue Service Progress Update Fiscal Year 2020, 26 (Dec. 2020), https://www.irs.gov/pub/irs-pdf/p5382.pdf.
8 Press Release, Internal Revenue Serv., IRS Criminal Investigation Veteran Selected as New Fraud Enforcement Director (Mar. 5, 2020), https://www.irs.gov/newsroom/irs-criminal-investigation-veteran-selected-as-new-fraud-enforcement-director.
9 Press Release, Internal Revenue Serv., 20-Year Exam Veteran Selected as New Office of Promoter Investigations Acting Director (Apr. 19, 2021), https://www.irs.gov/newsroom/20-year-exam-veteran-selected-as-new-office-of-promoter-investigations-acting-director.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.