IRS Wealth Squad

By Seth Kossman, Esq., CPA, LL.M., Baltimore

Editor: Uzell T. Freeman-Williams, CPA

Included in the IRS's mission statement is its role "to help the large majority of compliant taxpayers with the tax law, while ensuring that the minority who are unwilling to comply pay their fair share." IRS Commissioner Charles Rettig has made this "fair share" goal one of his top priorities and expressed to Congress the need to increase the IRS's budget so that it can actively enforce this measure. In fact, in an August 2021 letter to Sen. Elizabeth Warren, D-Mass., Rettig noted that for every 1% improvement in voluntary compliance, annual revenue could be expected to increase by approximately $30 billion per year. Just as staggering, an April 2021 press release by Treasury quoted a recent study that found that the top 1% of taxpayers failed to report 20% of their income and failed to pay nearly $175 billion in taxes owed annually.

To help tackle this problem, the IRS created what is colloquially known as the IRS Wealth Squad. Formally called the Global High Wealth Industry Group, the Wealth Squad is largely made up of highly skilled auditors and forensic accountants. It is housed in the Large Business and International (LB&I) Division of the IRS, more particularly, under the Pass-Through Entities (PTE) Practice Area. When appropriate, personnel from other business operating divisions within the IRS are brought in to offer assistance on a case.

The Wealth Squad targets both high-net-worth nonfilers and high-net-worth filers who have implemented sophisticated and complex structures or abusive tax transactions. Many times, the taxpayers under audit have foreign financial assets or bank accounts. For purposes of the Wealth Squad, a typical audit would cover business and financial enterprises controlled by individuals with assets or earnings in the tens of millions of dollars.

Origins

The Global High Wealth Industry Group is not a new program in the IRS; in fact, it was formed in 2009. The Internal Revenue Manual (IRM) added Section 4.52.1, Global High Wealth Program Processes and Procedures, in 2013 and updated it in 2019. The IRM explains that this group "was formed 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" (IRM §4.52.1.1.1(1)).

The goal of the program is "[t]o ensure GHW uses its limited resources to identify and examine high wealth taxpayers with the highest compliance risk in a consistent and efficient manner" (IRM §4.52.1.1(5)). As an aside, the Small Business/Self-Employed (SB/SE) Division started a similar, but more scaled-down, program in 2010 called High Income High Wealth to target taxpayers with incomes over $200,000. The Global High Wealth Program has received more publicity in recent years, due to increased congressional oversight, as well as Treasury Inspector General for Tax Administration (TIGTA) reports criticizing the IRS's underperformance in this area.

What has changed in recent years is that the scope of the Wealth Squad seems to be focusing more on high-net-worthnonfilers, while, historically, the focus appeared to be on auditing filed returns of high-net-worth individuals. The Wealth Squad's case inventory can come from many sources. These include referrals from other IRS groups, whistleblower claims received by the IRS Whistleblower Office, campaigns in which a taxpayer is identified as having a particular issue that the IRS identifies as having a high rate of occurrence in this population, and the discriminant function (DIF) scoring method. In DIF scoring, computers select returns for examination on the basis of their potential for change, based on IRS experience with similar returns (IRS Fact Sheet 2006-10).

IRS focus

Citing the complexity involved in the cases, coupled with the amount of potentially underreported income, Rettig announced that the IRS has prioritized these cases and that IRS examination personnel are auditing these taxpayers at a rate far higher than any other category of individual filers. Moreover, the IRS is expanding its efforts to recruit and retain experienced, sophisticated, and specialized examiners to conduct the examinations. Technology, including the use of data analytics and risk assessments, is another important area in which efforts are being focused.

Unlike a standard examination/audit of a single type of tax form that practitioners are accustomed to dealing with, an exam conducted by the Wealth Squad generally includes an individual tax return (called the "key case"), coupled with related income tax returns in which the taxpayer has a controlling interest and for which significant compliance risk is deemed to exist, such as interests in partnerships, trusts, S corporations, C corporations, other foreign entities, relationships with private foundations, large gifts, etc.

Case development

As a case develops from the early selection stage and is assigned to an examiner, it is not uncommon for individuals outside the Wealth Squad to be assigned to the team. Generally, specialists and technical advisers, including cross-border and financial products experts, engineers, and appraisers, are brought in to assist with the examination, though many times behind the scenes without ever having any contact with the taxpayer. Depending on the nature of the case, IRS Counsel and personnel from the Office of Fraud Enforcement (OFE), the Office of Promoter Investigations (OPI), and the Criminal Investigation Division (CID) may be involved.

Practitioners may expect to see significant crossover, data sharing, and collaboration between LB&I and other IRS divisions, mainly the Tax Exempt & Government Entities (TE/GE) Division and SB/SE. It is safe to assume that everyone assigned to the case has a role to play. No one is there by accident. It also should come as no surprise that the information document requests (IDRs) issued to the taxpayer will be very thorough and may even be perceived as overly broad. As an example, an item on the IDR may request a copy of all tax opinions received that have any bearing to the years under audit. Another request may be for copies of all tax preparation workpapers, including adjusting entries, closing entries, mappings, etc.

By the time the IRS contacts the taxpayer, it has performed a significant amount of due diligence in building the case file. During the course of an audit, the practitioner may come across two IRS terms/acronyms for the first time: "yK-1" is an interactive link analysis tool developed by the IRS to discover and explore tax entities and their relationships to one another. This is frequently used in helping the Wealth Squad prepare the case for audit. Another commonly used term is "LUQ," which refers to large, unusual, and questionable items. The Wealth Squad may spend significant time reviewing these items. While this holds true for all taxpayers, it is extremely important that taxpayers who are audited by the Wealth Squad have excellent records and substantiation that clearly document their reportable transactions and other material items.

Just as examinations of high-wealth taxpayers have their nuances, collections from this group of taxpayers may vary in how they are staffed and coordinated. For example, in early 2020, the IRS rolled out a special compliance initiative titled Revenue Officer Compliance Sweep (ROCS). This initiative involved having a team of revenue officers spend a specified period in particular geographic areas with larger concentrations of high-income/high-wealth individual taxpayer cases and business cases where payroll taxes were going unpaid. The scope and geographic areas of this initiative have continued to expand. Another program that has recently launched is "Operation Surround Sound." Here, too, the Wealth Squad, in coordination with its counterparts in the Collection Division, Exam, OFE, and, when appropriate, CID, works to identify and pursue the most egregious high-income nonfilers, as well as high-income filers with large balances due.

As with all matters before the IRS, it is generally prudent to advise clients to come into compliance voluntarily, before the IRS catches up with them. If there is potential criminal exposure, the IRS voluntary disclosure program may be the best option. It is advisable to speak with an attorney to discuss the best course of corrective action.

 

Contributor

Seth Kossman, Esq., CPA, LL.M., is a shareholder in the tax group of Baker Donelson in Baltimore and is a member of the AICPA Tax Practice & Procedures Committee. For more information on this article, contact thetaxadviser@aicpa.org.

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