The IRS Intends to Audit Hundreds of High-Wealth Taxpayers – Consider Getting Ready Now!

By Mark A. Ziemba and Soheila Shahidi

The Internal Revenue Service (IRS), through its Large Business and International Division (LB&I), has created a Global High Wealth (GHW) program to audit hundreds of high-wealth taxpayers who own assets or earnings in the tens of millions of dollars. The IRS takes a holistic approach in examining the high-wealth population by building an “Enterprise Case,” which would include the individual taxpayer and the enterprises the individual controls (e.g., partnerships, trusts, C corporations, S corporations, private foundations, etc.). 

Assessment of Returns

Before selecting a taxpayer for examination, various levels of risk assessment are conducted. The assessment includes analyzing the taxpayer’s entities and their relationships, identifying tax issues and trends, and understanding the enterprise of the taxpayer in general to determine any risk of noncompliance. The related entities that are considered high risk would be included in the case for examination.

Sources of Information to Select Taxpayers for Audit

Generally, LB&I Compliance Planning and Analytics (CP&A) prepares an initial list of the high-wealth taxpayer population and conducts a risk assessment analysis to identify returns with high-risk indicators for noncompliance. Those cases are, then, referred to Workload Services (WLS) for a more detailed risk assessment describe above.

WLS may also receive referrals from other IRS departments or whistleblower claims from the Whistleblower Office. Finally, WLS may also identify a significant issue related to high-wealth taxpayers and may screen all such population regarding that particular issue.

Preparing Now

Individuals with high net worth often use various entities for business purposes and to minimize their U.S. and worldwide tax liability. Given that the GHW program takes into account all of a high net worth family’s controlled entities in an audit, the announcement of this new program should serve as a fair warning to high net worth families to consider engaging independent tax professionals to assist them in determining the strengths and weaknesses of their existing structures and to consider the benefits of proactive remediation of problematic positions well before the GHW focuses in on the family. 

Consider hiring independent tax professionals to prepare an audit, as opposed to tax professionals with a long-standing relationship with the family or businesses that may minimize imbedded tax risks or have outdated knowledge relative to his or her planning, leaving the taxpayer exposed to attack. This is not to say families should change tax professionals.  Instead, with the advent of GHW and its intelligent holistic approach, high net worth families may be well served by having an independent tax professional gauge their exposure. The old phrase of “forewarned, is forearmed” may be good advice, as the GHW program is anticipated to be laser focused on ferreting out structures intended to reduce taxes and attacking such structures if they do not comply with current applicable tax laws.

Additionally, high net worth individuals with worldwide planning should consider whether a weak link in their U.S. planning could expose them to a larger audit risk, exposing their worldwide planning. Identifying and fixing that weak link now may well avoid the GHW audit altogether.