IRS “Wealth Squad” – Something to Keep in Mind During Tax Season

The IRS Global High Wealth Industry (“GHWI”) (part of the IRS Large Business & International Division) is auditing individuals with tens of millions of assets or income who utilize complicated financial and estate plan structures. GHWI was established by the IRS in late 2009, but now has a few years of service “under its belt”. The GHWI audit process involves a review of not only the taxpayer’s personal income tax return, but can expand to include a review of a taxpayer’s related partnership tax returns, fiduciary income tax returns, and estate and gift tax returns, to name a few. As part of the audit process, GHWI will analyze the taxpayer’s complete financial picture, and the enterprises that the taxpayer controls (including partnerships, trusts, subchapter S corporations, C corporations, private foundations, etc.). The audit can expand to include a review of the taxpayer’s returns for multiple years, and even the tax returns of individuals related to the taxpayer. This scope of audit is in contrast to the IRS historical approach of focusing on a single type of tax return, for a single taxpayer, for a single year. GHWI audit teams are supported by IRS counsel throughout the audit process due to the complexity of the issues that are the subject of the audits. A taxpayer will know when he or she is under audit by GHWI because the IRS examiner will identify himself or herself as part of such group.

Some examples of the broad scope of a GHWI audit include: (i) transfer tax issues (estate, gift and generation-skipping transfer tax), (ii) valuation issues, (iii) executive compensation, (iv) C corporation and S corporation issues, (v) noncash charitable contributions, (vi) partnership and LLC issues, (vii) passive activity loses, (viii) foreign trusts, and (ix) foreign bank account reporting.

It is important for a taxpayer within this target level of wealth (i.e., tens of millions) to be diligent about the precision of the management of his or her affairs so that he or she is in the best position possible to handle such an audit (especially if the audit process moves quickly). In particular, such taxpayers should consider taking the following steps: (a) review significant transactions from the last several years to ensure that they have been correctly documented, (b) review prior year tax returns to ensure that adequate disclosure has been achieved to ensure the “running” of the statute of limitations with respect to the information reported in those returns, (c) review internal protocols and standard operating procedures for related and controlled entities to ensure that appropriate record retention procedures are in place (e.g., for purposes of substantiation), (d) review any tax positions that are not conservative, and determine the importance of continuing to take such positions in light of the associated risk of taking such positions, and (e) engage appropriate counsel when issues arise or simply to conduct an internal audit to ensure that appropriate steps are being taken to reduce audit risk.

BakerHostetler’s Private Wealth and Tax Controversy and Litigation Groups are well situated to assist taxpayers who may be (or already have been) selected for audit by GHWI. Please contact Joe Verciglio at 216-861-7713, or at jverciglio@bakerlaw.com, if you have questions or need assistance.