Audit Time for High Income Individuals and their Companies has arrived

On a webinar hosted by the New York University Tax Controversy Forum on June 18, 2020, Douglas O’Donnell (head of the IRS Large Business and International Division/IRS-LBI) stated that the IRS will  begin a new campaign to audit hundreds of high-net-worth individuals from July 15, 2020 to September 30, 2020.  The audit campaign stems from the Global High Wealth Program under the Global High Wealth Industry Group of the IRS-LBI.

During 2009, the IRS announced the creation of a Global High Wealth Industry Group to increase its focus on matters related to high-income Taxpayers, their related entities, and to strengthen the rigor of its audit processes in this Taxpayer segment.  This group is also known as the IRS “Wealth Squad”.   

The Group targets “individuals with assets or earnings of tens of millions of dollars”.  The complex legal structures utilized by these Taxpayers for their domestic and foreign business and investment activities has driven IRS to launch this Group which uses a comprehensive and integrated type of review led by sophisticated and specialized IRS representatives, including forensic accountants.  The goal of the program is to “identify and examine high wealth taxpayers with the highest compliance risk in a consistent and efficient manner”.

The Wealth Squad updates its Processes and Procedures

On December 26, 2019, the Internal Revenue Manual updated its Global High Wealth Program Processes and Procedures and stated the following:

“GHW was formed to take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control. A GHW enterprise case consists of a key case, generally an individual income tax return, and related income tax returns where the individual has a controlling interest and significant compliance risk is deemed to exist. Controlling interest can include significant ownership of or significant influence over an entity or multiple entities within the enterprise. The enterprise case may include interests in partnerships, trusts, subchapter S corporations, C corporations, private foundations, gifts, and the like. GHW personnel work with other personnel from other business operating divisions within the IRS to address noncompliance across the entire enterprise. GHW consists of two functions, Workload Services (WLS) and the field examination groups”. 

The Wealth Squad knows their target audience

IRS utilizes mathematical modeling (big data analytics) to determine the examination potential of high wealth individual Taxpayers. It assesses the level of compliance risk contained in filed returns. Returns with the highest risk indicators will more likely be selected for audit. The “Wealth Squad” specialists determine the selection criteria and draw on resources throughout all of IRS, including the Criminal Investigation division.  IRS has stated that the focus on high income taxpayers and tax evasion will continue with its increased focus on foreign income and information reporting through FATCA and FBAR compliance monitoring. 

Some Wealth Squad audit “triggers” are:  

• transfer tax issues (estate, gift and generation-skipping transfer tax)
• valuation issues
• executive compensation
• C corporation and S corporation issues
• noncash charitable contributions
• partnership and LLC issues
• passive activity loses
• foreign trusts
• foreign bank account reporting
• overly aggressive tax strategies
• Documents for Hedge Funds.

Taxpayers ought to avoid the path of alerting the Wealth Squad

Under-reporting income or not reporting reportable income, including income from offshore accounts is a path to alerting the Wealth Squad. If you are a High Net Worth Individual, consult your tax specialist if you receive a “Wealth Squad” notice or if your tax returns are at risk for non-compliance.