High Wealth Enforcement is Coming-Get Ready By: STEVEN TOSCHER and TENZING TUNDEN
The moratorium on IRS investigations and collections set forth by the People First Initiative will be ending soon on July 15.[i] and very high wealth taxpayers should get ready for a little attention from the IRS. If the moratorium is not extended, the IRS is poised to start the examination of several hundred high net worth taxpayers. The IRS expects that between July 15 and September 30 several hundred examinations of these taxpayers will be started.[ii] Each of the cases assigned within the IRS Large Business & International (LB&I) Division will typically involve a pass-through business as the related entity, said LB&I Commissioner Douglas O’Donnell.[iii] A high-income individual’s enterprise could involve trusts in the Small Business/Self-Employed (SB/SE) Division, tiered partnerships under LB&I’s jurisdiction, and retirement plans that the Tax Exempt and Government Entities (TE/GE) Division examines. These examinations may also involve private foundations related to the taxpayer.
Global High Wealth Group
The Global High Wealth Group is an industry group created by the IRS LB&I in 2009. The purpose of the Global High Wealth Group (also known as the “Wealth Squad”) is to bring together an IRS team of specialist to coordinate the compliance, review and, if necessary, detailed examination of complex returns of high wealth individuals and their related entities. The Global High Wealth Group conducts tax compliance reviews of high net worth individuals and the network of enterprises and entities they control.
The Wealth Squad is designed to allow the IRS to better understand the sophisticated financial, business and investment arrangements of the taxpayer. The IRS does this by engaging a team of specialists to take a unified, holistic look at the entire web of inter-related entities controlled by the taxpayer to discover the entire economic picture of the enterprise and to assess the tax compliance of that overall enterprise.
The initial examination focus has been on individuals with tens of millions of dollars in assets or income. Following a review of the initial examinations, the selection criteria will likely evolve to take into account information obtained in the examinations as well as to utilize the expertise of the expanding group of Wealth Squad specialists which will include flow-through specialists, international examiners, economist to identify economic trends, appraisal experts to advise on valuation issues, and technical advisors to provide industry or specialized tax expertise. It will draw upon resources throughout the IRS including the TE/GE Division, the SB/SE Division, and numerous international information exchange agreements. In truly egregious situations, the examiners may also make a referral of taxpayers and/or their advisors to the IRS Criminal Investigation division given the IRS new emphasis on fraud referrals from the operating divisions.
IRS LB&I commissioner Douglas O’Donnell has connected this enforcement effort with the recently announced Tax Cut and Job Act (“TCJA”) compliance campaign.[iv] The TCJA campaign involves issue-based examinations instead of the LB&I old approach of placing large multinational businesses under continuous audits by a rolling teams of examiners. This will involve large amount of information sharing amongst various IRS divisions.
The TCJA compliance campaign is much broader in approach than other campaigns.[v] This campaign will look at the entirety of a tax return and thus give examiners the authority to look beyond a specific issue. The TCJA compliance campaign also encompasses the impact on tax returns from the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The treatment stream for this campaign may include examinations, soft letters, outreach, new and improvement practice units and development of future issue-based campaigns.
Since its creation in 2009 the IRS Global High Wealth Group has been criticized that it was ineffective. The criticism is largely due to employee turnover at the IRS, budget cuts, and complex transactions that take time for examiners to understand.[vi] However the IRS has increased it’s budget and has been hiring steadily and has a new determination to tackle this very complex compliance and enforcement matter. The IRS new willingness to accomplish its mission across the operating division lines will also add effectiveness to this effort. The past problems with enforcement will likely not occur now that the IRS is better equipped to audit these specialized group of taxpayers and have learned important lessons from their past examination efforts. One organization. One mission. We know why Willie Sutton robbed banks and we know why sound tax administration requires that all taxpayers comply with the tax laws.
Steven Toscher is the Managing Principal of Hochman Salkin Toscher Perez P.C., and specializes in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.
Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C. Mr. Tunden recently graduated from the Graduate Tax Program at NYU School of Law and the J.D. Program at UC Davis School of Law. During law school, Mr. Tunden served as an intern at the Franchise Tax Board Legal Division and at the Tax Division of the U.S. Attorney’s Office (N.D. Cal).
[i] The Peoples First Initiative suspended many collection and examination functions due to COVID-19 between April 1, 2020 and July 15, 2020.
[ii] Comments from IRS LB&I Division Commissioner Douglas O’Donnell at the NYU Tax Controversy Institute held on June 18, 2020.
[iv] Supra note 2.
[v] IRS LB&I campaign descriptions available at https://www.irs.gov/businesses/corporations/lbi-active-campaigns.
[vi] Jesse Eisinger and Paul Kiel, The IRS Tried to Take on the Ultrawealthy. It Didn’t go Well, ProPublica, April 5, 2019, available at https://www.propublica.org/article/ultrawealthy-taxes-irs-internal-revenue-service-global-high-wealth-audits.