In its April 28, 2021 Press Release (the “Release”) “Investing in the IRS and Improving Tax Compliance”, the US Department of the Treasury addresses available enforcement activities relating to reducing the U.S. Tax Gap; estimated to reach approximately $7 Trillion over the next ten years. The Release states that providing the IRS with the resources and information it needs to address tax evasion will generate an additional $700 billion in tax revenue over the next ten years (net of the investments made).
Moreover, a recent study by the National Bureau of Economic Research found that the top 1 percent of income earners omits reporting 20 percent of their income and fails to pay nearly $175 billion in taxes owed annually.
IRS Global High Wealth Group
More than 11 years ago in 2009, the IRS announced the creation of a Global High Wealth Industry Group (GHW). Its ongoing reason for existence is enhancing compliance focus on in this high-income Taxpayer segment. This group is also known as the IRS “Wealth Squad”.
The GHW targets “individuals with assets or earnings of tens of millions of dollars”. The complex structures that this sector’s members use for domestic and foreign business and investment activities propelled IRS to launch this Group. The GHW utilizes a comprehensive and integrated review process led by sophisticated and specialized IRS representatives, including forensic accountants. Its goal is to “identify and examine high wealth taxpayers with the highest compliance risk in a consistent and efficient manner”.
On December 26, 2019, the Internal Revenue Service updated its Internal Revenue Manual’s Global High Wealth Program Processes and Procedures stating the following:
“GHW was formed to take a holistic approach in addressing th thee high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control. A GHW enterprise case consists of a key case, generally an individual income tax return, and related income tax returns where the individual has a controlling interest and significant compliance risk is deemed to exist. Controlling interest can include significant ownership of or significant influence over an entity or multiple entities within the enterprise. The enterprise case may include interests in partnerships, trusts, subchapter S corporations, C corporations, private foundations, gifts, and the like. GHW personnel work with other personnel from other business operating divisions within the IRS to address noncompliance across the entire enterprise”.
IRS utilizes mathematical modeling for determining the examination potential of high wealth individual Taxpayers. It assesses the level of compliance risk contained in filed returns. Returns with the highest risk indicators will more likely be selected for audit. “Wealth Squad” specialists determine selection criteria and draw on resources throughout the IRS, including the Criminal Investigation division. IRS reports that its focus on high income taxpayers and tax evasion will continue with its increased attention on foreign income and information reporting through FATCA and FBAR compliance monitoring.
IRS Examination Functions Shifted to High Income Taxpayers
The commentary by IRS Commissioner Chuck Rettig in A Closer Look: Impacting the Tax Gap discusses the IRS’ examination shift to tax returns that include high income taxpayers, pass-through entities, multinational taxpayers involving international tax issues, large pension plans, private foundations, virtual currencies and Non-filers. The report sheds light on the IRS’ focus and enforcement programs that are in place.
IRS Examination functions for Return-Selection program will tackle High-income taxpayers through the Discriminate Function (DIF) scoring method, related returns through a partnership examination, through a campaign, the Global High Wealth (GHW) program, offshore compliance work, international individual compliance activity, review of foreign tax credits, or corporate officer compliance checks.
IRS will continue to expand Focused Examinations on the High-Income and High-Wealth Taxpayer
It is evident that the IRS has shifted its examination resources and technology to increase its focus on high-income and high-wealth taxpayers. It has placed experienced Revenue Agents with “substantial accounting skills” against the population of High-Net-Worth/High-Net-Income Individuals and the complex issues associated with their tax returns.
Out of compliance Taxpayers need to prepare for tougher IRS enforcement.
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