New IRS Tax Gap Estimate and IRS CI FY2022 Annual Report Spotlight Taxpayer Risks in 2023

Two recent reports from the Internal Revenue Service (IRS) and IRS Criminal Investigation (IRS CI) highlight likely enforcement priorities for 2023. Individual and corporate taxpayers should take these potential priorities into account when assessing their tax strategies and weighing their options for addressing any outstanding reporting or payment deficiencies.

IRS Tax Gap Report: Underreporting Is a Major Issue, Other Issues Require Enhanced Focus in 2023

In October, the IRS announced that the federal tax gap for tax years 2014 through 2016 increased to $496 billion. It also announced a preliminary estimate of $540 billion for tax years 2017 through 2019. According to the IRS, the vast majority of the tax gap—approximately 80 percent—is attributable to underreporting of individual and corporate taxpayers’ federal tax liability.

However, the IRS also emphasized that its current tax gap calculations and estimates do not account for several forms of tax fraud. In particular, it noted that its tax gap figures do not adequately address underpayments related to:

• Cryptocurrency and other digital assets
• Income from flow-through entities
• Income from illegal activities
• Offshore activities

In its announcement, the IRS states that it is “actively work[ing] on new methods for estimating and projecting the tax gap to better reflect changes in taxpayer behavior as they emerge.” This necessarily means that the IRS is enhancing its enforcement capabilities in these areas as well. The IRS announced significant investments in its enforcement infrastructure earlier in the year, and, as a result, we expect that all of the above will be priority enforcement areas in 2023.

IRS CI FY2022 Annual Report: Multiple Forms of Tax Fraud To Remain Top Investigative Priorities Going Forward

According to IRS CI’s FY2022 Annual Report, the agency opened 2,500 criminal investigations and secured 1,564 convictions (with a 90.6 percent conviction rate) last year. While IRS CI investigates all types of financial crimes, it devotes the substantial majority of its resources to combating tax fraud—placing particular emphasis on several priority areas. During FY2022, these areas include:

• Abusive tax schemes
• Corporate tax fraud
• Cybercrimes
• Employment tax fraud
• General tax fraud
• Identity theft
• International tax violations
• Public corruption
• Refund fraud

Notably, there are several areas of overlap between the IRS’ priorities identified in its tax gap report and IRS CI’s priorities listed in its FY2022 Annual Report. For example, offshore account disclosure violations, refund fraud, corporate tax fraud and cryptocurrency-related tax fraud received special attention in both reports. These are likely to remain top enforcement priorities in 2023—and beyond—and this is a fact that U.S. taxpayers should take into account going forward.

Request a Confidential Consultation at Thorn Law Group in New Jersey

Thorn Law Group represents U.S. taxpayers in IRS audits, IRS CI investigations and other federal tax-related matters. If you need help dealing with the IRS or IRS CI, we invite you to get in touch. To request a confidential consultation with tax lawyer Kevin E. Thorn, Managing Partner of Thorn Law Group, please call 201-842-7696, email ket@thornlawgroup.com or contact us confidentially online today.