IRS Targets the Wealthy via Wealth Squad
By Attorney Morris N. Robinson, CPA, LL.M.
April 6, 2017
IRS operates a Wealth Squad, which brings together teams of IRS specialists to coordinate the audit of wealthy taxpayers. IRS identifies wealthy “targets” with secret algorithms that are skewed against the wealthy. IRS also identifies wealthy “targets” through its investigation of whistleblower claims, received from the IRS Whistleblower Office.
The formal name for the Wealth Squad is the Global High Wealth Industry Group, according to a 2011 article in the Wall Street Journal. The IRS formed this group in 2009 “to take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control,” according to the Internal Revenue Manual (section 126.96.36.199).
The Wealth Squad does more than review individual income tax returns. As part of its “case-building” IRS may also evaluate:
- Corporation Income Tax Returns (Forms 1120 and 1120S)
- Partnership Income Tax Returns (Form 1065)
- Estates and Trust Income Tax Returns (Form 1041)
- Exempt Organization Returns (Form 990)
- Estate Tax Returns (Form 706)
- Gift Tax Returns (Form 709).
Where the “target” has foreign income or assets, IRS may also evaluate:
- Foreign Trusts (Form 3520 and 3520-A)
- Foreign Disregarded Entities (Form 8858)
- Foreign Corporations (Form 5471)
- Foreign Partnerships (Form 8865)
- FBARs – Foreign Bank Account Reports (FinCEN Form 114)
- Certain Foreign Financial Assets (Form 8938)
IRS typically begins its audit with a thoughtful, far-ranging information document request (“IDR”). The information requested is highly invasive. A complete response is often very time-consuming. For example, in a typically IDR, the IRS may request:
- A listing of all domestic and foreign bank statements for all entities controlled by the taxpayer or over which the taxpayer had signature authority, along with documentation regarding the source of funds used to establish each bank account.
- Documents relating to all entities where the taxpayer was an officer, director, trustee, grantor, beneficiary, signatory over bank accounts, etc.
- A listing of all recent transfers of wealth between the taxpayer and the taxpayer’s businesses, family members and foreign trusts.
- A listing of all foreign real estate owned along with the source of funds used in the acquisition of the real estate.
Taxpayers who fail to provide this information in a timely fashion invite an IRS administrative summons, which can be enforced by IRS in the United States District Court. An administrative summons can quickly poison a cooperative relationship with IRS that is essential in bringing the audit to a quick and satisfactory resolution. Thus, an administrative summons should usually be avoided, if possible.
IRS may then insist that the taxpayer participate in an opening interview with two IRS personnel: the Revenue Agent and the Revenue Agent’s supervisor. The supervisor is typically experienced in Wealth Squad audits. The Revenue Agent is typically very well-prepared. The taxpayer’s answers are written down by the Revenue Agent into her laptop and may serve as the basis for a criminal prosecution if the taxpayer is not truthful. Thus, it is essential that the taxpayer and the taxpayer’s representatives be fully prepared. If the initial interview goes well, the case will be “on track” for an early resolution.
For Wealth Squad audits, IRS tracks both “No-Change Rates” and “Productivity Yield: Dollars per Audit Hour.” It follows that the best audit-defense strategy is to quickly determine if the case will likely result in a “no change.” If so, it is often best to cooperate fully with IRS to secure a “no change” with the smallest investment by IRS of tax-audit hours. We typically assist IRS in reaching a “no change” by providing detailed explanations of complex fact patterns to assist IRS personnel in closing cases promptly.
In our experience, taxpayers often do well when represented by small, focused, tax defense firms:
- With strong tax-audit experience representing wealthy taxpayers.
- With a deep understanding of United States taxation of domestic and foreign income.
- With a deep understanding of the IRS foreign asset disclosure forms, listed above.
We work with taxpayers, their lawyers and their tax accountants. Thus, tax-audit clients may retain their present legal advisors and tax accountants when they work with our firm. So consider using our services, especially if you are a high income earner, with an income in excess of $1 million – and especially if you have significant foreign income or significant reported foreign assets.
This is what we bring to the table:
- We are qualified. Each member of our licensed professional staff is either an attorney or a CPA. Each attorney has, or in a single instance is working towards, an advanced LL.M. degree in taxation
- We are experienced tax audit defenders. Our tax professionals have successfully defended clients from erroneous tax assessments and significant penalties, including penalties arising from the late filing of delinquent foreign disclosure forms. We are also very familiar with IRS programs for the late filing of delinquent disclosure returns, which enable those who qualify to avoid all penalties.
- We give back to the tax profession. Over the past 18 months, our tax professionals have participated in over half a dozen tax seminars sponsored by various sections of the Boston Bar Association, including a seminar on Tax Audit Defense with an IRS attorney who represents IRS in Tax Court. We have also participated in over half a dozen national and international webinars on United States taxation of foreign income, with audience members participating from New Zealand, the United Kingdom, Israel, and Canada, as well as from all parts of the United States. We also blog regularly.
- We charge reasonable fees. Although we have “large firm” expertise, we are a small firm. This means that our overhead is less and we pass on the savings to you in the form of reasonable hourly rates.
- We are responsive. Our small size also makes us highly responsive to the needs of our clients.
- We are stable. We have occupied the same offices at The Landmark Building in the heart of Boston’s Financial District for well over a decade.
For additional information on the IRS Wealth Squad, see the IRS Internal Revenue Manual, Chapter 52: Global High Wealth Industry Processes and Procedures. (4.52.1) https://www.irs.gov/irm/part4/irm_04-052-001.html.
End of blog post.