As a follow up to my colleague George Connelly’s earlier post concerning the IRS’s recently announced “Global High Wealth” Industry Group, I offer some further thoughts on what the IRS is attempting to do with this new group focusing on wealthy individuals. The IRS recently announced that the group has issued its first batch of audit letters and the audits of wealthy individuals will soon commence.
The IRS has created the group in the LMSB division, which generally handles audits of the largest corporations under a “team” audit concept. A team audit means that the IRS assigns several agents to the case, including, where appropriate, specialists in areas like international taxes, financial products, and employment taxes, as well as engineers and economists.
The IRS is concerned with very wealthy individuals who own multiple entities using complicated structures to avoid U.S. federal income taxes. The individuals may be operating foreign businesses or may have foreign investments through foreign trusts, partnerships, or corporations.
In the past, the IRS may have audited a closely-held corporation, or a family-owned partnership, only if the entity was selected through the normal IRS return-selection process. IRS agents are required part of the “package audit” process to inspect related tax returns, so an agent auditing a closely-held corporation would inspect the returns of the principal shareholders. The agent might even pick up the shareholder’s return for audit if an issue warranted audit (e.g. if the closely held corporation had constructive dividends resulting from the corporation’s payment of personal expense of the shareholder). But as a general matter, the IRS did not coordinate the examination of related entities or entities owned by the same individuals or by related family members.
By creating this group as part of LMSB and assigning teams of agents to the audits, the IRS will now be able to coordinate the examination of a wealthy individual and the related domestic and foreign entities that individuals or related parties own. This will allow the IRS to determine whether the wealthy individual is using entities to shift income to family members or to shift income offshore, where it may be subject to little or no tax. As the descriptive word “global” indicates, the IRS will be particularly interested in individuals who own foreign entities. That does not mean that the IRS Global Wealth unit will ignore wealthy individuals who own domestic entities exclusively, but the IRS will be particularly interested in those who have foreign investments and entities.
This new initiative comes on the heels of the UBS foreign bank account scandal and the IRS’s foreign account voluntary disclosure program. The UBS disclosures of accounts held by U.S. citizens and residents and the disclosures that taxpayers have made through the voluntary disclosure program have raised the IRS’s awareness that foreign businesses and investments of individual taxpayers may be an area of substantial noncompliance. By forming the Global High Wealth Group program, the IRS seems to be indicating its belief that there may be a number of wealthy taxpayers who are using foreign entities to avoid U.S. income taxes (whether through proper tax planning or aggressive tax schemes).
In creating this group, the IRS will be bringing some of its most seasoned and well-trained agents to audit wealthy individuals and their related entities. This represents a significant change in the IRS’s approach to these audits and will likely involve coordinated in-depth examinations of multiple entities. Wealthy individuals selected for audit under this new program should prepare themselves for an intensive scrutiny of all their businesses and investments, particularly businesses and investments held through foreign entities. It will be interesting to see if this area proves worthy of the significant resources that the IRS seems to be investing by creating this new group.