Over the summer, we discussed the Service’s announcement that its Large Business and International (LB&I) Division planned to launch a new compliance campaign aimed at high-wealth taxpayers. At the time of the original announcement details were murky. Fresh off the heels of the People First Initiative, the Commissioner of the LB&I Division, Douglas O’Donnell, stated that the Division would “…move to start the examination of several hundred individuals who have high income…” between July 15th and September 30th. Mr. O’Donnell also indicated that each exam would include not just a high-income taxpayer, but also any related entities, typically pass-throughs.
Holly Paz, the LB&I’s Director of Pass-Through Entities Practice Area, provided new insight recently. Speaking October 20th at a virtual session hosted by the UCLA Extension Tax Controversy Institute, Ms. Paz revealed that the IRS has begun the first several hundred exams of high-income taxpayers, with more to come as agents search for “large, unusual, or questionable items” on tax filings.
High-income audits are a time and resource consuming process. Take for instance the recent news that the CEO of Vista Equity Partners, Robert Smith, pleaded guilty to criminally evading more than $200 million in taxes. Nearly four years passed between the beginning of the IRS’ investigation and Mr. Smith’s guilty plea. Although the case of Mr. Smith is extraordinary in scope , the typical high-income audit will still take years.
The time and effort required of these examinations (for both the IRS and taxpayers) is due to several reasons. First, the exam includes more than just a review of the 1040, which often times shows only a piece of a taxpayer’s overall income and assets. The Exam team will also review the tax filings of pass through entities and other entities associated with that taxpayer and his or her family. Second, as different sources of income, different entities, and different assets are evaluated, the Exam team must consult with a variety of subject matter experts within the IRS that specialize in specific transactions. All of these subject matter experts and technical advisors will have their own questions and issues to focus upon. Finally, as the exam team follows income through the various pass through and other entities, additional powers of attorney may be necessary to avoid unnecessary complications regarding disclosures.
Ms. Paz made clear that “[t]he high-income area is something that you can expect us to have a continued presence in. It’s an important area. We will continue to be engaged there. Just like we did with global high wealth . . . we will take feedback from taxpayers, from the examiners, and we will use that to further refine our efforts and improve the process.”
Steven Miller is a former acting Commissioner of the IRS, and currently leads a team of tax attorneys and specialists at alliantNational. If you have any questions or concerns regarding high-wealth or high-income exams, please contact Steve at [email protected]