On June 18, 2020, Douglas O’Donnell, Commissioner of the IRS Large Business and International Division (LB&I), announced that on July 15, 2020, the IRS will begin a new campaign to audit hundreds of high-net-worth individuals. The IRS maintains a specialized, experienced group of examiners solely focused on conducting audits of high-income/high-wealth taxpayers—the Global High Wealth Industry Group (GHW) of the LB&I division (commonly referred to as the IRS “Wealth Squad”). The Wealth Squad is specially trained to examine complex domestic financial affairs, offshore accounts, foreign trusts, and entities controlled by the taxpayer, including partnerships, corporations, foundations, and trusts.
THE WEALTH SQUAD
GHW examines the complete financial picture of high-wealth individuals and the enterprises they control. In announcing the formation of the Wealth Squad, then-IRS Commissioner Douglas Shulman stated, “For a variety of reasons—including valid business reasons—many high-wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences.” The IRS believes these practices often mask aggressive tax strategies.
WHAT IS THE WEALTH SQUAD LOOKING FOR?
The Wealth Squad audit focuses on the taxpayer’s entire economic picture and assesses tax compliance across all income sources. GHW audits are generally very broad and comprehensive—consisting of a key case, generally an individual income tax return, and related income tax returns of an entity where the individual has a controlling interest, such as a C corporation, S corporation, partnership, private foundation, or trust.
The Wealth Squad places particular focus on foreign assets, such as:
- foreign bank accounts;
- offshore retirement accounts;
- foreign trusts;
- business interests in entities holding foreign accounts; and
- overseas inheritance.
The Wealth Squad makes use of its broad summons power to obtain the books and records of any companies in which the taxpayer holds a financial interest, and also looks at accounts held in foreign banks subject to reporting under the Report of Foreign Bank and Financial Accounts (FBAR) rules. The IRS will also often employ a matching program to review across different accounts and reporting documents.
The Wealth Squad often requests the following information:
- All sources of income, when it was paid, who paid it, and how it was paid;
- Identification of all assets, owned directly or indirectly, inside and outside the United States (including copies of annual brokerage account statements for each brokerage account held);
- Identification of all liabilities owed, directly or indirectly, by the taxpayer or any entity controlled by him or her, inside and outside the United States;
- Complete copies of all financial statements, net-worth computations, or other financial data;
- The full name, address, and taxpayer identification number of any C corporation and S corporation, or disregarded entity or trust, of which the taxpayer owned at least 20%, or was on the Board of Directors, or where there was signatory authority over funds and accounts controlled by the entity;
- All gifts or assets transferred and/or sold to children or other relatives;
- All assets transferred or sold to a charitable organization or foundation;
- All estate-planning transactions to reduce potential estate-tax obligations;
- All documents related to an interest in or signatory authority over a foreign financial account with assets in excess of $10,000, and provide copies of FBARs; and
- All documents related to any offshore or cross-border financial transaction.
High-net-worth individuals with global assets and holdings should understand how the global high-net-worth audit initiative may impact them and the steps they should consider taking to prepare for and defend against such an audit.
News Source：【WINSTON&STRAWN LLP 2020/06/22】
