The Internal Revenue Service (IRS) has announced a new and more aggressive measure aimed at combating tax evasion among high-income taxpayers.
The effort, funded by the Democratic-backed Inflation Reduction Act, seeks to close a significant tax loophole used by some business corporations to avoid paying taxes. According to the agency, this initiative could generate an additional $50 billion in revenue over a ten-year period.
With the November elections approaching, the Joe Biden administration is eager to demonstrate how funds from the 2022 legislation, which provided the IRS with a significant investment over a decade, are being used to increase tax revenues and modernize services to taxpayers.
Janet Yellen, Secretary of the Treasury, stated that thanks to the resources offered by this controversial law, both the Treasury Department and the IRS have the necessary tools to stop long-standing tax abuses.
Of Course, No One Wants to Pay More Taxes, and There Is Controversy
Additional funding for the IRS has been a point of contention between the political parties. Republicans have criticized these funds, calling them wasteful, and have tried to reduce the agency’s budget. The IRS’ new initiative, which includes several regulatory guidelines, targets “change-of-basis transactions,” a practice used by some business partnerships to maximize tax deductions and minimize tax liability.
The IRS will closely monitor these transactions in current and future audits, ensuring that they are not conducted without a substantial business purpose. IRS Commissioner Danny Werfel emphasized that these practices allow for undue tax evasion and that the new guidance aims to put an end to such practice.
In recent decades, many American companies have decided to use a legal loophole to pay less taxes: they have changed their structure from C corporations, subject to the corporate tax rate, to partnerships.
A Government Accountability Office report pointed to the need for the IRS to improve its efforts to audit large and complex associations. That’s why the IRS wants to go after those evaders who are hiding behind these legal black holes: the agency detailed ambitious plans to significantly increase audit rates on wealthy taxpayers and large corporations.
Be Prepared: More Audits to Be Conducted by the IRS
During the years 2010 to 2021, due to lack of funding, audit rates for billionaires and large corporations decreased, and staffing in IRS compliance offices was reduced by 30%.
To step up audits, the IRS is hiring the accountants, engineers, economists, data scientists, lawyers and tax experts needed to conduct complex audits. Werfel has reiterated the agency’s commitment not to increase audit rates for American households earning less than $400,000 a year, keeping these rates at levels no higher than in 2018.
IRS Launches Direct File in Oregon, to File Your Taxes for Free
Earlier this year, the IRS launched a pilot version of its own tax filing service called Direct File. This service allows taxpayers to file their federal returns for free directly with the IRS. More than 140,000 people successfully used the program in its pilot phase. The agency plans to continue and expand this free tax filing program in 2025.
After the successful plan of the IRS Direct file program last tax season in a handful of states, the government agency decided to expand it to the entire country gradually by adding States little by little.
The program was recently launched in the state of Oregon and will be available starting next year for households and individuals to file their taxes for free without having to resort to the expensive services of tax preparers.
File Your Taxes for Free: Here’s How
Direct File is a free option through a platform on the IRS website for taxpayers to file their federal tax returns. The pilot test was conducted in two states and showed that hundreds of thousands used it easily saving them millions of dollars in tax preparer fees.
According to data from the IRS itself, about 140,000 taxpayers will use the platform in the last tax season, exceeding the original goal that was to reach 100,000. About 19 million American taxpayers live in these two states and were eligible to use the program.
The U.S. Department of the Treasury expects at least about 580,000 residents of the state of Oregon to be eligible to use the free and present tool on their taxes.