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IRS' Werfel Discusses Enforcement and Technology Initiatives as Budget Cuts Loom

By:
Karen Sibayan
Published Date:
Dec 16, 2024

According to IRS Commissioner Danny Werfel, the IRS announced a new enforcement campaign—even under the specter of significant cutbacks and with expected changes on the horizon given the incoming Trump administration. The announcement was made in a quarterly update on Dec. 12 about the IRS' strategic operating plan, as reported by Accounting Today.   

Accounting Today said the IRS' new enforcement campaign aims to improve taxpayer compliance among those with complicated returns and those who intentionally avoid their tax responsibilities.

The publication reported that the IRS is also set to increase the features of the Tax Pro Account, Business Tax Account and Individual Online Account programs.

Werfel talked about the new enforcement initiative and technology improvements while fielding questions from reporters about the future of the IRS as it faces the likelihood of $20 billion in budget cuts and new leadership under former congressman Rep. Billy Long, R-Missouri, whom President-elect Donald Trump appointed to replace Werfel three years before his term ends, Accounting Today reported. 

Regarding compliance, the IRS is targeting an issue related to the exploitation of deferred legal fees. The IRS has started an examination campaign to investigate a tax deferral transaction in which taxpayers, including plaintiff's attorneys or law firms, do not report legal fees earned from representing clients in litigation on a contingency fee basis.

The IRS said that plaintiff's attorneys or law firms that represent clients in suits on a contingency fee basis could get up to 40% of the settlement amount. They can defer this amount by entering into an arrangement with a third party that is not related to the litigation, who can then distribute it to the taxpayer in the future. This could even extend to 20 years or over from the settlement date. 

With this arrangement, the taxpayer cannot report the deferred contingency fees as income when the case is settled or when the funds are transferred to a third party. Accounting Today reported that taxpayers defer income recognition until the third party distributes the fees under the scheme. 

The IRS' new enforcement initiative aims to ensure taxpayers are treated similarly in terms of compliance and consistency if they have the same situation. The contingency fees must be included in taxable income in the year the funds are transferred to the third party.

Aside from focusing on these types of arrangements, the IRS is still focused on offshore tax evasion by unreported financial accounts and structures. The agency uses data analytics and other tools to find different forms of offshore tax evasion. The agency also asks whistleblowers to report on offshore tax evasion and other tax schemes by filing a claim.  In fiscal year 2024, the agency paid roughly $123 million awards based on tax and other amounts collected. Roughly $475 million of this is attributable to whistleblower information, Accounting Today reported. 

"Our compliance work is protecting billions of dollars of revenue by enforcing laws already on the books, and we're cracking down on terrorist financing and drug dealers through IRS Criminal Investigation's work," Werfel stated.

The other top issue that Werfel discussed is technology improvements. He spoke specifically about enhancements to the Tax Pro Account, which allows tax professionals to submit an authorization request to a taxpayer's IRS Online Account.

According to Accounting Today, the Tax Pro Account program assists tax professionals in managing their authorization relationship with taxpayers, viewing taxpayer information, and acting on behalf of the taxpayer.
 
Werfel noted that the IRS has "taken some initial steps with this tool. We've added the ability for tax professionals to easily navigate secure two-way messaging to digitally communicate with the IRS on behalf of their clients. There is also a new virtual assistant, which allows tax professionals access to an automated chat bot to help them resolve tax issues. Tax professionals can escalate to live chat for collection-related issues for assistance. These are important steps, but we've heard from tax professionals, and we know we need to do more with this important tool."

According to the IRS, when it's fully developed, the Tax Pro Account will become a better online tool that can initiate power of attorney and tax information authorizations for business taxpayers that may be reviewed and approved in their Business Tax Account, link and manage business Centralized Authorization File access and look at refund and audit status for individual and business taxpayers, among other functions, Accounting Today reported. 

Additionally, as part of its Digital First Initiative, the IRS is expanding the features in the Business Tax Account program, which is an online self-service tool for business taxpayers. C corporations can now activate a Business Tax Account, which brings into the millions the total number of business entities that are now eligible for this online self-service tool.

On top of the improvements to the other two programs, taxpayers can also receive more help for their personal accounts via the IRS Individual Online Account, according to Werfel. An example would be they can retrieve tax-related information from one source such as digital copies of notices and letters, Accounting Today reported. 

Werfel also delved into the IRS criminal investigation, where agents assisted in delivering convictions in many high-profile criminal cases. They also led to the recovery of billions and long prison sentences for dangerous criminals, Werfel noted.

Meanwhile, Werfel did not respond to reporters' questions regarding Trump's announcement to name Long the new IRS commissioner, even though Werfel's term ends in November 2027. However, according to Accounting Today, he did answer a question about what can happen if Congress cuts an added $20 billion in IRS funding provided in the Inflation Reduction Act.

"It's $20 billion that has already been provided by Congress, and it is funds that we are using and will rely on to continue to improve our enforcement efforts on complex filers, high-wealth filers, large corporations and complex partnerships," Werfel noted. 

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