The agency will be focusing on “ segments of taxpayers with complex issues and complex returns where audit rates are minimal today , such as those related to large partnerships , large corporations , and high-income and high-wealth individuals ,” according to the agency ’ s “ Inflation Reduction Act Strategic Operating Plan ,” released in April .

More than half of the agency ’ s new funding was allocated to enforcement , and the plan makes it clear that “ the current administration wants the IRS to increase audits of wealthy individuals and large corporations ,” says Rochelle Hodes , a principal at the ac-

“ Historically , the IRS has done a poor job auditing large partnerships and S corporations . ... I expect this will be a big focus .” — Bill Smith , CBIZ MHM counting firm Crowe in Washington , D . C . But how long will it take for the agency to step up enforcement ?

“ I don ’ t anticipate that audits are going to ramp up too quickly , as the IRS still has to hire and train agents ,” says Bill Smith , national director of tax technical services at CBIZ MHM in Washington , D . C . “ It does not have hundreds of experienced agents who have been sitting around waiting to get assignments . But with the IRS having a three-year window to start an audit ... they could get the hire-and-train machine cranked up in time to start audits of 2023 tax returns .”

That means 2022 returns are less likely to be affected .

Some terms of the IRS plan also need fleshing out . “ The IRS refers to ‘ making ’ $ 400,000 , which is not a tax term ,” Smith says . “ If a taxpayer has taxable income under $ 400,000 , is that the threshold ? He could have $ 5 million of capital gains and $ 4.7 million of capital losses and have taxable income under $ 400,000 , but did he ‘ make ’ $ 5 million or $ 300,000 ?”

One question likely to come up is how much business owners take from a salary and how much from distributions at their companies , says Bruce Primeau , president of Summit Wealth Advocates in Prior Lake , Minn . “ A salary is subject to payroll taxes , where distributions are not . The IRS is likely to crack down on those business owners that focus most of their cash flow out of their businesses as distributions and take too small a salary ... to minimize the amount of payroll taxes they ’ re paying ,” he says .

Pass-through tax breaks may be another area of focus , Smith says .

“ Most wealthy taxpayers have a lot of pass-through income or loss from invest-

10 | FINANCIAL ADVISOR MAGAZINE | JUNE 2023 WWW . FA-MAG . COM