The IRS announced establishing a new division targeting “pass-through” entities, which the agency claims will hold America’s wealthiest tax filers “accountable.”
“Pass-throughs are frequently used by higher-income groups and can be complex tax arrangements,” the agency said. IRS Commissioner Danny Werfel called the focus on such entities “another part of our effort to ensure the IRS holds the nation's wealthiest filers accountable to pay the full amount of what they owe.”
“This new unit will leverage Inflation Reduction Act funding to disrupt efforts by certain large partnerships to use pass-throughs to intentionally shield income to avoid paying the taxes they owe.”
“These efforts are consistent with our broader commitment to use Inflation Reduction Act dollars to end the era of historically low error rates for wealthy and large entities.”
The following are considered pass-through business entities—general partnerships, sole proprietorships, limited partnerships, limited liability partnerships, limited liability companies, and S Corporations.
The group is set to include LB&I employees as well as employees from the Small Business/Self Employed division. The agency will coordinate with the National Treasury Employees Union (NTEU) on its latest initiative.
Though the IRS claims they will target pass-through entities in a bid to hold the wealthy accountable, the fact that such entities include small business structures like sole proprietorships and partnerships has raised concerns about working-class American businesses being potentially targeted by the agency.
Targeting Low-Income PeopleThe IRS is already under scrutiny for targeting low-income earners in individual filings. A January report by Syracuse University's Transactional Records Access Clearinghouse (TRAC) said that the IRS follows a trend of pursuing more low-income groups compared to billionaires and millionaires.
During fiscal year 2022, millionaires “did have the highest odds of being audited. However, if one ignores the fiction of auditing a millionaire through simply sending a letter through the mail, the odds that millionaires received a regular audit by a revenue agent (1.1 percent) was actually less than the audit rate of the targeted lowest-income wage-earners whose audit rate was 1.27 percent!” the report said.
The rate of income tax audits per 1,000 individuals stood at 12.7 for the lowest-income wage earners and 2.3 for everyone else. This made low-income wage earners the taxpayer class with, by far, the highest audit rates—clocking around five and a half times more than everyone else.
The report notes that low-income wage earners have historically been targeted by the IRS, not because they account for the most underreporting, but because they are seen as “easy marks in an era when IRS increasingly relies upon correspondence audits yet doesn’t have the resources to assist taxpayers or answer their questions.”
“The high-income terminology is being used loosely inside the IRS with no common understanding of what the term means,” the report said. The IRS relies on the decades-old definition of high income, which classifies anything above $200,000 in income as high.
The Pass-Through UnitIn its Sept. 20 press release, the IRS said that the new pass-through unit will include people who join the agency under the latest hiring initiative it announced last week.
The new division is being set up with the funds that the IRS received from the Inflation Reduction Act (IRA) passed in August last year. The IRA provided the agency with $80 billion in funding.
Republicans eventually reduced the funding by $20 billion when they struck the debt deal with Democrats during the summer.