Global High-Wealth Audit Update

While the IRS audit rate for individual returns of persons earning less than $200,000 has hovered at about 1% over the past several years, 12% of individual taxpayers with incomes of $1 million or more were audited in fiscal year 2011—up from 6% in 2009. Unfortunately, these statistics do not really help CPAs and other tax professionals gauge how many individuals are under examination by the IRS’s Global High Wealth Industry group (GHWIG), one of six industry groups within the IRS Large Business and International (LB&I) Division. The IRS created the GHWIG in fall 2009.

According to IRS statistics gathered by the Transactional Records Access Clearinghouse (TRAC), the GHWIG audited only 36 returns of high-wealth individuals in its first 2½ years of operation (TRAC, “Few Millionaires Audited by IRS Global High Wealth Group” (April 10, 2012)). At a February 2012 American Bar Association meeting, IRS LB&I senior-level counsel James Fee pointed out that the GHWIG is handling dozens of “enterprise examinations” (see Coder, “Global High-Wealth Audits Growing, Subject to LB&I Procedures,” 2012 TNT 34-14 (Feb. 21, 2012)). Another participant in the meeting, Thomas Collins, territory manager (global high wealth) for LB&I, said that if one takes into account all related returns, the number of returns is in the hundreds. To provide some context to these numbers, it is important to understand that LB&I handles well in excess of 40,000 examinations every year.

In describing his expectations for GHWIG in a Dec. 10, 2009, speech, IRS Commissioner Douglas Shulman stated:

many high-wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies. And there are other tax considerations regarding high-wealth individuals, including international sourcing of income and tax residency, and offshore structures and bank accounts, to name just a few.

Shulman also stated that the GHWIG program would initially look at individuals with “tens of millions of dollars of assets or income” and the “entire web” of business entities they control. (The full text of Shulman’s remarks during the 22nd Annual Institute on Current Issues on International Taxation at George Washington University Law School is available online.)

In 2012, persons who are under audit by the GHWIG are finding the examinations bewildering and taking much longer than a traditional individual audit. Tax professionals who have represented high-wealth clients in these audits have stated these high-wealth individuals often do not have the staff to handle the IRS’s intensive information document requests (IDRs), which can have as many as 50 questions (see Coder, “Audits of Wealthy Taxpayers Pose Challenges, Practitioners Say,” 2011 TNT 189-2 (Sept. 29, 2011)). Some agents have been quoted as suggesting that a GHWIG examination could last two or more years. Unfortunately for these high-wealth individuals, these same tax professionals report that the cases are being managed by LB&I like large company examinations, whereas the individuals under audit might be more familiar with Small Business/Self-Employed Division examinations.