IRS auditing wealthy nonfilers and high-income filers linked to certain entities
Those who think they may be targets should consult a tax attorney now, before hearing from the IRS.
During this economically and personally difficult year of 2020, the IRS surprisingly extended its iconic annual tax filing (and paying) deadline of April 15 until July 15. But in an apparent push to make up for some of the revenue that has not come in yet, the agency has designated its Large Business and International (LB&I) Division to launch two enforcement campaigns on July 15 that will increase audits of two specific groups of taxpayers.
Higher-income individuals who have failed to file returns
The IRS will conduct outreach to nonfiling taxpayers to urge voluntary filing compliance, but the enforcement campaign will include audits and enforcement action. The CPA Practice Advisor reports that a May 2020 government report estimated that well-off taxpayers who intentionally chose not to file returns caused a $37 billion tax underpayment from 2011 through 2013 alone.
Audit could result in a past-due tax bill, penalties and potentially criminal sanctions. In situations where a taxpayer experienced significant personal stress during the failure to file time period, the IRS may be more willing to negotiate a resolution like an installment plan.
Wealthy households with associated pass-through entities or private foundations
According to Forbes, LB&I plans to audit “several hundred” of these taxpayers who have either affiliated pass-through entities like S-corporations, some LLCs, or partnerships, or ties to private foundations. A pass-through business – also called a flow-through entity – does not pay taxes directly, but rather the income is reported on and taxed through the individual tax returns of the owners, partners or members (depending on the kind of entity). An IRS examination would look at whether the entity owners correctly reported entity earnings on the owners’ returns and whether they paid appropriate taxes.
Taxation of private foundations is fairly complex, but for this campaign, it seems likely that the agency may look at whether foundation managers, substantial contributors and family members or related businesses of these parties have engaged in prohibited behaviors like self-dealing – which could involve making prohibited loans to certain parties – or failing to make required charitable contributions. These and other similar violations may require payment of excise or penalty taxes.
The IRS has reportedly identified over 1,000 private foundations with ties to high-worth individuals.
Seek legal counsel early
Any taxpayer who is concerned that they may be a target for these audits should speak with an experienced tax attorney as soon as possible. Legal counsel could provide advice about whether to take affirmative action such as filing a past-due return or otherwise approaching the IRS, or to consider a response should the IRS announce an audit. There may be other steps to take that would increase the likelihood of a more positive outcome.
Talking to counsel is very important because the tax bill plus penalties could be expensive, and in some serious cases, the government could consider criminal charges that put the taxpayer in danger of potential jail time or other financial liability.