2021 IRS Tax Audit and Investigation Priorities

What are your chances of an IRS Audit?

This quick read will give you the 2021 IRS Tax Audit and Criminal Tax Investigation Priorities.

IRS Agency officials said last year they plan to increase audits on small businesses and investors by 50% in 2021. The result could be a surge in audits of companies ranging from mom-and-pop retail stores and technology startups to investment funds. At our tax law firm, even though it is still early in tax year 2021, we have already seen an increase in new clients contacting us regarding tax audits and government investigations.

The IRS priorities for IRS tax audits are:

  1. High Income

    The IRS is preparing to audit several hundred high-income households that own pass-through entities (i.e., partnerships, limited liability companies, and S-Corporations) or are connected with a private foundation. Such an approach will emphasize the recently updated partnership audit rules, the qualified business income deduction under Section 199A per TCJA of 2017, and tax benefits associated with private foundations.

    Section 199A of the 2017 Tax Cuts and Jobs Act provided a way to let pass-through businesses claim a 20 percent tax deduction on qualified business income. The goal was to give small and mid-sized businesses who file as pass-through entities a tax break comparable to the corporate tax rate. A 20 percent tax deduction is extremely tempting especially when the rules and regulations for the (then) new Section 199A tax deduction were complicated and difficult to interpret for many businesses and their accountants.

    The IRS will also be contacting high-income individuals who have not filed 2019 tax returns. The IRS has targeted this program to taxpayers who receive $100,000 or more of income per year and have failed to file a tax return.

  2. Cryptocurrency Investors

    The IRS has initiated Operation Hidden Treasure, a joint effort between the civil office of fraud enforcement and the criminal investigation unit of IRS. We anticipate this program utilizing both the civil functions of the IRS via IRS Tax Audits and the criminal enforcement function, via a Criminal Tax Investigation.

    See: IRS Launches New Cryptocurrency Tax Evasion Detection Program

  3. Offshore Bank Accounts and Post-Voluntary Disclosure Program

    Offshore Bank Account Audits and Criminal Prosecutions continue to be a focus for the Government. In addition, Post-Voluntary Disclosure Program Audits and Criminal prosecutions have begun. Those familiar with the IRS Offshore Bank Account Initiatives may remember that there are several strategies taxpayers may consider when it comes to their unreported foreign bank accounts. Now that a significant number of US citizens have come forward under these programs, the IRS is mining the information submitted to further its compliance goals.

    As part of the mining, additional criminal prosecutions are being brought. For instance, recently, a taxpayer was charged with filing a false “Streamlined Submission” in conjunction with the IRS Streamlined Domestic Offshore Procedure. In another example, a taxpayer was prosecuted (and now sentenced) for filing false tax returns in conjunction with the tax returns he submitted outside the Voluntary Disclosure Program (submitted) in an attempt to remedy his unreported offshore bank account problem.

  4. IRS Forms 3520/3520-A Non-Compliance

    The Internal Revenue Service has instituted a new program aimed at examining the failure to file Form 3520/3520-A. A U.S. taxpayer faced with this particular examination/audit risks the imposition of penalties, as much as 100 percent of the value of the transaction not timely reported, even if there is no unreported income attributable to the transaction.

    When is Form 3520 or Form 3520-A required?

    Form 3520:
    U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report:

    • Certain transactions with foreign trusts.
    • Ownership of foreign trusts under the rules of sections Internal Revenue Code 671 through 679.
    • Receipt of certain large gifts or bequests from certain foreign persons.

    Form 3520-A:
    A foreign trust with at least one U.S. owner files this form annually to provide information about:

    • the trust
    • its U.S. beneficiaries
    • any U.S. person who is treated as an owner of any portion of the foreign trust.

What to do:

If you are worried that you are not in compliance with the tax code or may be subject to tax audit or tax investigation or if you are contacted by the government, consult with a Tax Attorney. Remember, only an attorney can provide the privilege of Attorney-Client privilege.

How far back can the IRS audit me?

There are various laws intended to prevent government overreach and protect taxpayers. Some of which provide limited time periods for which the IRS can audit you. Generally, there is a 3 year look back window for an IRS audit. However, this window may be extended to six-years. Further, in the case of civil tax fraud, there is no limitation on the time period for fraud penalties could be assessed. If you have any questions feel free to contact us!

Moskowitz LLP is a tax law and accounting firm that has dedicated over 30 years to representing individuals and businesses with civil and criminal tax problems, cleaning up accounting and tax messes, and providing tax and accounting advisory services. We offer practical and affordable tax and accounting solutions, business services, estate planning and administration.

Remember, a blog post or email blast is not a substitution for obtaining personal legal and tax consultation. This information is not intended to be legal or tax advice nor does it form an attorney-client relationship between us.