IRS Set to Launch New Enforcement Campaign to Audit High Net-Worth Individuals and Related Entities on July 15, 2020

The commissioner of the Large Business and International IRS Division recently announced that on July 15, the agency will launch an enforcement campaign that will examine several hundred high-income households that have a related partnership, S corporation, trust or foundation. Relatively recent changes at IRS – including improved cooperation among the agency’s different divisions and its growing use of data analytics – will be used in this latest enforcement campaign targeted at high net-worth individuals and entities they control.

The announcement follows Treasury Secretary Steven Mnuchin’s statement in March at a Ways and Means Committee hearing that he directed IRS Commissioner Charles Rettig to provide a plan to increase the funding to audit more high-income earners.

Global High-Wealth Audit

Using a holistic approach to understand the complete financial picture of high net-worth individuals and the entities they control is known as a global high-wealth audit. In the past, the wide variety of complex subject areas involved in conducting a global high-wealth audit presented a challenge to IRS. Gaining a complete understanding of a high-income individual’s transactions with a related entity including a private foundation was sometimes thwarted by the agency’s siloed approach to administering taxes. For example, one division within IRS would review individual income tax returns, while other divisions would review returns filed by related partnerships, S corporations, trusts or private foundations.

IRS intends to break down its silos through increased cooperation among the agency’s divisions and the use of data analytics. Instead of compartmentalizing data among the different divisions, IRS is taking an enterprise approach to reviewing data. The agency’s move in this direction has already placed a number of global high-wealth enterprises in its cross hairs. The audits focus on foreign assets, including bank accounts, foreign trusts, business interests, and overseas inheritance. The commissioner of the Tax-Exempt and Government Entities IRS Division said that the agency expects to see increased audits of private foundations as a part of the enforcement campaign. The official said that IRS has identified over 1,000 private foundations that are linked to global high-wealth enterprises.

Private foundations that engage in prohibited self-dealing transactions – such as making loans to a disqualified person – risk heightened scrutiny from IRS.

The Takeaway

IRS is launching a comprehensive audit campaign involving global high-wealth audits, which target high-wealth individuals and the entities, including private foundations, they control. These audits are complex and require an understanding of several different areas of tax law. Relatively recent improvements at IRS such as improved cooperation among the different divisions and its growing use of data analytics, has already helped the identify hundreds of potential audit targets. High net-worth individuals with global assets and related entities need to understand how the enforcement initiative may impact them and steps they should take to prepare for an audit. Andersen can assist in reviewing a high net-worth individual’s tax positions with respect to themselves as well as the entities they control and identify potential areas of noncompliance in advance of an audit or provide defense support during an IRS audit.