INSIGHT ARTICLE |
Authored by RSM US LLP
For the past decade, the IRS has become increasingly concerned with the upward trend in both the quantity of taxpayers who do not file required tax returns (non-filers) and the amount of tax that is foregone because of noncompliance. These issues create a significant difference between what taxpayers should pay and what they actually pay on time, commonly referred to as the “Tax Gap.” After study and review, the IRS determined that high-income taxpayers comprise a large percentage of the amount of the tax gap, even though they represent a small fraction of the taxpayer population.
In an effort to close the tax gap, the IRS announced a compliance initiative that targets high net worth taxpayers with interests in foundations, partnerships and other pass-through entities. Executed through a series of IRS audits, the initiative will be ongoing and does not have an expiration date. The IRS’s Large Business and International Division formed the Global High Net Worth Group (“GHW”), commonly referred to as the “Wealth Squad.” to conduct these audits. The Wealth Squad takes a holistic approach to examinations, which may involve examining entities controlled by the high net worth taxpayer.
The American Families Plan, proposed by the Biden Administration, calls for an additional $80 billion in funding for IRS enforcement activities. There does not currently appear to be broad Congressional support for this level of funding however a significant increase in funding is expected.
High net worth individuals of interest to the Wealth Squad are those with one or more of the following characteristics:
- Majority ownership or significant influence over an entity or entities
- Control or substantial influence over a private foundation
- Substantial charitable contribution deductions
- International tax filings or international transactions
- Family offices
- Self-employment income or employment tax issues
- Information return filing requirements
- Expense deductions for the use of yachts and airplanes
- Uses complex tax planning to significantly reduce taxable income
What can be done to mitigate the risk of an examination in the current or future years?
- Maintain good records and be able to substantiate the business purpose of every deduction and tax basis in property
- Satisfy all formal requirements relating to entity formation and registration
- Keep separate ledgers to easily segregate business activities
- Compile a complete list of commonly targeted assets such as foreign bank accounts, foreign trusts, and foreign business interests and ensure proper reporting has been prepared and filed
- Understand gifting practices and have records available of gifts reported on gift tax returns and those not reported
- Use business credit cards for business purposes only
- Do not try to move expenses around and play the audit game
- Be wary of tax promoters who promise large tax deductions
- Be honest and open regarding the extent and location of your assets and accounts– understand that the IRS can summon records from third parties and can share information with other countries
- Determine issues that could trigger an examination of the tax return and consider filing an amended return, if necessary
- Ensure there is a business purpose for transactions with related private foundations
- Conduct proper due diligence on any transaction with a related tax benefit, including documenting any legal or accounting opinion
Reach out to your tax advisor for additional detailed information and guidance.
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This article was written by Carol Warley, Alina Solodchikova, Cindy Hull, Michael Reeves and originally appeared on 2021-08-17.
2021 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
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