Top IRS Enforcement Targets for 2021

IRS compliance enforcement actions have decreased significantly since 2010. However, those days appear to be over. In 2019, the IRS went on a hiring spree, hiring hundreds of new examination (audit) and collection personnel. In 2020, many of these new hires were assigned to enforce compliance.

Does that mean high IRS compliance enforcement activity from 10 years ago will return? Possibly. However, we can reasonably expect the retooled IRS to target areas of noncompliance that have been left idle for the past few years.

IRS compliance enforcement targets

With many new IRS personnel on the job, the IRS will focus their compliance resources on resolving big compliance problems. Here are 7 targets the IRS anticipates to do more in-depth reviews.

#1 High-income taxpayers 

The big problem for the IRS: The IRS was criticized for auditing low- income taxpayers at the same rate as higher income taxpayers (income of $1 million or more). In response, Treasury and the IRS said it would like to audit more higher-wealth taxpayers in the future. 

IRS compliance efforts: More IRS revenue agents will mean more audits on higher wealth taxpayers. Especially taxpayers who enter into certain transactions like conservation easements or hold interests in foreign financial accounts and entities. In the past, high-income taxpayers have experienced audit rates as high as 12% (2011). In 2018, the audit rate of high wealth taxpayers was 3.2%. Expect more high income audits and good returns on investment as the average amount owed on a high income audit in 2018 was $115,259. 

 #2: Small business taxpayers 

The big problem for the IRS:  Tax gap studies  show that taxpayers who do not receive information returns (W-2s, 1099s) and must voluntarily report their income and deductions are the biggest contributors to noncompliance. In fact, according to IRS studies, for tax years 2020-2021 small businesses were the biggest culprits and misreport their income by almost 60%. Unreported tax on small business income for individuals was estimated to be $182 billion. Unreported self-employment taxes were estimated to be $68 billion for the same period. 

IRS compliance efforts: Enforcing compliance on small businesses is costly for the IRS. However, the IRS recently hired and on-boarded hundreds of new field auditors (called revenue agents). These new revenue agents may be training on audits of small businesses. 

#3: Crypto-currency holders 

The big problem for the IRS: There is no audit trail on crypto-currency and the IRS knows that means noncompliance. Like small business owners, the IRS knows where there is no virtual currency information reporting (i.e. W-2s, 1099s) and the potential for large gains, there is a high likelihood of noncompliance.    

IRS compliance efforts: The IRS first issued guidance on the tax treatment of virtual currency in 2014. In 2016, the IRS requested authorization to issue a John Doe summons on a virtual currency exchange platform in order to obtain certain records of taxpayer who used virtual currency and,  in July 2019, the IRS began issuing letters to taxpayers that may have failed to report income resulting from virtual currency. These efforts were just the beginning. The IRS began working on finalizing how and where to report crypto income and what type of income taxpayers must report when they get paid with crypto. 

#4: Employers with unpaid payroll taxes 

The big problem for the IRS: 72% of all revenue collected in the US tax system comes from withheld payroll taxes. When employers don’t pay their payroll taxes, the US Treasury takes a double hit. First, the IRS does not get withheld income and social security taxes. Second, the employer may have also claimed a credit for the unpaid withholding. The IRS views employer collection and nonpayment of employees’ withholdings (called “trust fund” taxes) as a very serious offense.  

IRS compliance efforts: The IRS is diligently onboarding more field collection resources (revenue officers). Egregious actors who have multiple incidents of unpaid payroll taxes with different entities (called “pyramiding”) face IRS criminal investigation. 

#5: Certain nonfilers 

The big problem for the IRS: The IRS claims that for years 2011 through 2013, nonfilers only represent $39 billion in lost revenue annually to the US Treasury. Many tax experts disagree with this estimate. The big problem with nonfilers is that they leave the tax system for good. Also, IRS tolerance of nonfilers erodes the integrity of the voluntary compliance system. 

IRS compliance efforts: The IRS has been criticized for not chasing two groups of nonfilers: high income nonfilers (especially those without withholding) and taxpayers who do not file a return after they have requested an extension of time to file. The IRS hired more field resources to chase nonfilers. In the future, we may see the IRS pursue the more egregious nonfilers. 

#6: High tax debtors 

The big problem for the IRS: From 2010 to 2018, the IRS lost almost half of its field collection personnel (revenue officers). Many high tax debt taxpayers were put on hold because the IRS simply did not have the resources to chase them. 

IRS compliance efforts: Since 2019, the IRS has significantly increased the number of its field collection personnel (revenue officers or ROs). The marching orders for these new revenue officers were to let tax debtors know that they exist. These new ROs are contacting more higher debt taxpayers and repeat file/owe taxpayers to get them back into compliance. 

#7: Taxpayers with refundable credits 

The big problem for the IRS: It is estimated that 33% of all earned income tax credit payments – over $16 billion a year – are erroneous.     

IRS compliance efforts: EITC and additional child tax credit refund hold audits continue to be an IRS audit target. These are easy IRS audits as they are done by mail and taxpayers rarely contest the IRS’s findings. Subsequently, the IRS was under scrutiny for using their limited audit resources on lower-income taxpayers who claimed EITC. However, the IRS is still focused on reducing the 33% error rate and IRS mail audit resources will continue to flag and audit these returns in the future. 

The Target: all taxpayers with notices 

Since 2001, the IRS has understood that the most cost-effective manner to enforce compliance is to let taxpayers know that they are there after they file. The IRS cannot audit or enforce collection on all taxpayers, but they can let the taxpayer know that they may be subject to further scrutiny by sending them a notice. In 2018, the IRS sent over 219 million notices to taxpayers.   

The compliance by notice strategy is here to stay. It lets all taxpayers know that the IRS is still there. For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you. 

About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

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