Recently, Douglas O’Donnell, Commissioner of the IRS’s Large Business and International (LBI) division, announced the Service’s intention to launch a new compliance campaign aimed at high-wealth taxpayers. The actual launch was expected to occur on or around July 15, which is when most IRS campuses were scheduled to reopen following pandemic-induced closures. Specifically, the campaign will focus on high-income filers with an ownership interest in pass-through entities (partnerships and S corps).
During my tenure in Commissioner O’Donnell’s current job, we rolled out the Global High Wealth process and teams. The thought at the time, as I am sure it is today, was quite simple. It seemed to us that looking at a particular form 1040 of a wealthy individual did not tell the whole story of what was happening with that individual or his or her family. In order to get a true understanding of the flow of income (and the effective tax rate of the veritable web of entities that such families operate), it was necessary to do much more.
To understand and appropriately scrutinize such a web, it was determined that we needed to build teams of specialists, including partnership specialists, trust and private foundation specialists, and others. New tools were developed that I am quite sure have been improved on in my time away. I will say that the depression of IRS resources caused a delay in the full roll out of our intended path. In my time in the private sector I have only been involved in a handful of such examinations. They are time consuming audits for both taxpayers and the IRS. But from what Commissioner O’Donnell has said, it seems the Global High Wealth teams will be stepping up their work. Not a surprise given the Congressional interest and dismay as Congress compares the level of examinations of low versus high income persons.
Global high-wealth audits, typically involve a team of revenue agents taking a years-long deep dive into all of a wealthy Taxpayer’s entities, revenue sources and business interests. Commissioner Rettig, when he was still a practitioner, referred to Global High Wealth (sometimes called wealth squad) audits as “audits from hell.” The IRS calls it a “holistic approach.” Both seem correct to me. Those who fall into such an examination are likely in for a long journey.
So what can taxpayers subjected to these “audits from hell” expect? As stated above, this isn’t a new strategy for the Service. For starters, these agents aren’t focusing on a single return. Expect an in-depth look into the following as applicable:
- Interests in partnerships, s-corporations, and other flow-through entities (including hedge funds);
- Private foundations and other related non-profits;
- Gifts, trusts, and estate tax filings;
- Foreign sourced income and assets;
- Verify 199A compliance; and
- Participation in bespoke tax strategies, including reportable transactions and transactions of interest (anything that goes on a Form 8886).
Now that the IRS is in the process of regaining some audit strength and resources, I am not surprised that the IRS has returned to Global High Wealth. It made sense during my time at the IRS and it makes at least as much sense now.
If you have questions about global high wealth exams, or any other tax matter, feel free to reach out to me at [email protected]