Expect Increased Audit Scrutiny by the IRS
The Global High Wealth Industry Group (GHW), a division of the IRS, was created in 2009 and its purpose is to audit, investigate, and collect taxes from high-net-worth individuals and their related entities. The IRS defines and targets high-net-worth individuals having incomes of $200,000 or more. The GHW targets these wealthy taxpayers to ensure they are paying their “fair share” of tax each year. After receiving increased oversight pressure from the Treasury Inspector General for Tax Administration, along with scrutiny and criticism of the groups under performance, major revisions and updates were made to improve the program. Today, the IRS is steadily cracking down on tax evasion and fraud focusing on high-net-worth filers and now non-filers with complex income structures.
As noted by the IRS during their research on high-wealth noncompliance, economists and researchers have found the top 1% of the U.S. tax population have failed to report over 20% of income resulting in nearly $175 billion in unaccounted tax revenue each year.1 The GHW has increased its resources and come together with highly skilled auditors, forensic accountants, and specialists to help catch tax fraud and pursue criminal investigations against violators and their related entities. Within the IRS’ Global High Wealth Program Processes and Procedures, divisions are collaborating to examine red flags that may be correlated with abusive tax structures and transactions including, but not limited to, the following:
- Complex organizational structures
- Strategies and structures commonly used by individuals in the highest tax brackets to shelter income, claim deductions they are not entitled to, and commit other misreporting transgressions
- Financial enterprises and businesses with assets or earnings over $10 million
- Foreign and offshore financial assets and bank accounts
- Interests in complex partnerships, trusts, S-corporations, other passthroughs, and foreign entities
- Relationships with private foundations
- Large gifts2
If chosen, the IRS will audit not just the individual, but also the entities they control and hold interest in. The audits and proceedings are often lengthy, costly, and require a wide array of information and preparation. The IRS will require substantial books and records, including but not limited to tax forms, tax workpapers, account reports, financial statements, bank account records, and more for all tax years in question. With advanced developments in technology, the IRS audit and criminal investigation divisions can now discover and analyze the relationship between an individual and the entities they are connected to. This has led to significant increases in the audit pool and taxpayers considered to be high-income earners are more likely to be selected for audit.
High-wealth taxpayers may need to exercise additional diligence in matters of compliance obligations and may want to proactively revisit open year returns and supporting documentation to be well prepared in the event of an audit. The penalties for non-compliance may be severe and could result in thousands to millions of dollars in fines, tax payments, and even criminal exposure. The IRS currently has a voluntary disclosure program for individuals who discover filing errors and want to become compliant with tax obligations.
It is extremely important to employ an experienced tax advisor or attorney to walk you through the voluntary disclosure process and discuss other options related to compliance and the resolution of tax matters.
FORVIS has a specialty tax controversy group that can assist with IRS resolutions, pre-audit risk assessment, documentation services, and tax compliance solutions for individuals and business entities both domestic and foreign. If you find yourself questioning the treatment of previous filings or are already under audit, our highly experienced tax professionals will help alleviate the burden by evaluating your specific situation, walking you through the compliance steps, and preparing all necessary documentation and correspondences to the IRS on your behalf.
For more information, or to contact our tax team, please reach out to your professional at FORVIS or submit the Contact Us form below.