Alerts and Updates
IRS Marks Extended Deadline with News That Audits Targeting High-Net-Worth Individuals Can Be Expected
August 4, 2020
The Wealth Squad is specially trained to examine complex domestic and offshore financial activities.
In March, to help people facing the challenges of COVID-19, the Internal Revenue Service (IRS) announced a sweeping series of steps to assist taxpayers by providing relief on a variety of issues ranging from delaying tax payments to deferring tax filings to postponing compliance actions, including audits.
Well, IRS audits are back… and high-net-worth taxpayers are being specifically targeted.
On July 15, 2020, the IRS commenced, through its Large Business and International Division (LB&I), a new compliance campaign that will examine Tax Cuts and Jobs Act issues specifically targeting high-net-worth taxpayers. These audits will commence between July and September of this year. The tax targets in these new examinations will include:
- Sec. 199A – Qualified Business Income Deduction
- Sec. 163(J) – Business Interest Deduction limitation
- Sec. 965 – Mandatory repatriation of previously untaxed foreign earnings
- Sec. 172 – Net Operating Loss Deduction refund claims
- Foreign reporting and assets, including foreign/offshore trusts, bank accounts, retirement accounts, business interests, gifts and inheritances
The new campaign will examine these issues specifically and, likely, the taxpayer’s entire tax return and income sources, including the businesses, trusts, private foundations and accounts that they control and invest in. In essence, the entire “enterprise” of high-wealth taxpayers can be examined. We expect these audits to be broad and comprehensive in scope. IRS will then share what is learned by these examinations throughout the agency. Translation: This new campaign will likely result in a growing number of expanded examinations of high-wealth individuals from the personal income tax returns to connected entities both foreign and domestic such as trusts, foundations, partnerships, LLCs and other pass-through entities.
Interestingly, the LB&I division will assign these new audits to a specialized, highly trained group of auditors known the Global High Wealth Industry Group (GHW) whose sole focus is the examination and audit of the tax returns of high-income, high-wealth taxpayers. Think of the GHW, commonly referred to as the IRS “Wealth Squad,” as the IRS special ops forces. The Wealth Squad is specially trained to examine complex domestic and offshore financial activities, including sophisticated and complex structures and arrangements whether in the form of partnerships, corporations, foundations or trusts.
Are You a Target?
If you are a high-income/high-wealth taxpayer with deductions, losses and earnings in the categories noted above, your chances increase. If you are a high-income/high-wealth taxpayer with global investments, pass-through investments, trusts, holdings and assets, your chances increase exponentially.
This new, targeted audit campaign creates a progressively more challenging and higher risk audit process. “How do I prepare for and defend myself against these audits?” you may ask. Conduct a simulated audit, as we often recommend.
High-net-worth taxpayers may wish to consider engaging an experienced CPA and tax lawyer to conduct a simulated audit for the purpose of reviewing record keeping practices, examining existing tax positions, conducting simulated interviews, experimenting with mock IRS document requests and obtaining advice on correcting problems or deficiencies that would be likely targets in the event of an actual IRS Wealth Squad examination.
We typically recommend the hiring of independent tax lawyers and CPAs under the attorney-client privilege to conduct the simulated audit and assess exposure. By no means are we recommending that one change tax advisers. Rather, high-wealth taxpayers and families are often better served with the involvement of truly independent tax advisers falling under the attorney-client privilege to assess exposure and develop the strategy to mitigate.
Despite fewer resources, the IRS’ new LB&I campaign has arrived. And the IRS’ focus on high-wealth individuals, who commonly use sophisticated financial, business and investment arrangements with complicated and layered legal structures, makes much sense.
In the event you are contacted by the IRS and informed your return is being audited or an adjustment is being made to your return, it is imprudent to ignore it. But do not respond directly. Comprehensive and thoughtful assessment is crucial. Professional representation is often recommended, and a firm offering tax lawyers and CPAs, such as those in our National Tax Controversy Group, provides attorney-client privilege and other advantages during an audit.
From an adjustment perspective, even if the IRS is correct in making the adjustment, there may be an error in the recalculation of tax.
For Further Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, Mary Beth Lee, Steven M. Packer, or any of the practitioners in the Tax Accounting Group. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.