July 10, 2017
Despite having its own belt tightened, IRS targets the wealthy in audits
On behalf of Lawrence Brown
A specialized unit conducts extensive examination of people and entities at the highest levels of wealth.
According to Investment News in September 2017, the IRS budget has decreased by almost one-fifth since 2010 (adjusted for inflation) and its workforce by almost 15 percent. Still, the agency continues to audit robustly wealthy taxpayers because those audits are more likely to end up increasing the federal tax coffers.
Specifically, the IRS in 2016 reportedly examined collectively throughout all of its divisions about one-fifth of all returns of individuals that reported at least $10 million in adjusted gross income. Investment News reports that the IRS Small-Business/Self-Employed Division focuses on wealthy taxpayer audits, especially high-level gift and estate tax returns.
Since 2010, the IRS has also maintained the Global High Wealth Industry Group as part of its Large Business and International Division. According to IRS Commissioner Doug Shulman in remarks shortly after the group’s creation, its focus is to look not only at a wealthy individual but also at “the entire complex web of business entities controlled” by that taxpayer. Related entities could include trusts, foundations, business endeavors and interests, overseas property and offshore accounts, royalty rights, hedge funds, S and C corporations, and more.
The IRS communicated at the time the GHWIG was established, according to Forbes, that the agency recognizes that wealthy people utilize complex, “sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences.” The agency also acknowledged that these practices can be entirely legal, but that some could “mask aggressive tax strategies.”
Forbes describes aspects of the GHWIG audit practices:
- These audits are likely to involve multiple tax years and can take multiple years before conclusion.
- The examiners are a team of highly specialized experts in tax matters related to extreme wealth.
- Examiners and others on staff are experts on specific aspects of common business and investment practices and structures used by high-net-worth individuals. For example, expertise may be needed in international transactions, valuation, particular industries and more.
- On at least one occasion, the IRS retained a private law firm to assist with an examination involving a corporation.
- During examination of related entities, other people affiliated with those entities may also be audited.
Tax counsel imperative
First, a person with high net worth or a large number of sophisticated investment or business concerns should anticipate which transactions and practices will raise the interest of the IRS. A knowledgeable tax lawyer can help the taxpayer to carefully structure and document these matters in anticipation of IRS review so that appropriate professional attention is focused prospectively, rather than in response to a later examination for the first time.
Second, anyone of wealth who is contacted by the IRS about a potential examination should immediately consult with experienced legal counsel, especially involving matters affiliated with high net worth. An attorney who has already worked on GHWIG audits will be ready to address the issues raised and communicate with the agency on behalf of the taxpayer. The matters involved are likely extremely complex and review will take considerable time and attention. Having a seasoned tax lawyer involved can make all the difference.
The attorneys at Brown, PC, in Fort Worth, Texas, represent individual and business taxpayers of major net worth facing IRS audit throughout the Metroplex, across Texas and nationally.