On April 27, 2022, the Internal Revenue Service updated its processes and procedures found in the Internal Revenue Manual for audits of Global High Wealth (GHW) individuals. Such individuals are defined to include those holding assets or having income in the tens of millions of dollars.
The IRS utilizes employees comprising the GHW to conduct audits of the “complete financial picture of high wealth individuals and the enterprises they control.” A typical case entails an audit of an individual tax return and related tax returns of enterprises that the individual holds a controlling interest. Individuals and controlled enterprises are selected for audit based on a compliance “risk score” derived from the IRS’ Compliance Data Warehouse. The IRS may also select such individuals for audit based on referrals, whistleblower claims, or where the IRS is aware of industry type issues that make the GHW individual more likely to be out of compliance with federal income tax law.
What is driving this increased interest level of the IRS in GHW individuals is a 10-year trend of low and decreasing audit rates. The Government Accounting Office reported on this in May of 2022 and the Senate Finance Committee has heard recent testimony in that same regard. The IRS is able to use technology to identify compliance issues for lower income individuals but the IRS contends that GHW individuals are less likely to have non-compliance issues identified in such a manner because of the complexity of their income and business affairs.
The GHW individual is perceived to have benefitted from a decreasing and less experienced IRS workforce. This has led to Congress passing additional funding legislation to enable the IRS to actively recruit talent to increase the rate of audit for this group of taxpayers.
We recently have been engaged to provide IRS audit defense for a GHW client. The audit is being conducted remotely by a highly experienced IRS Revenue Agent from the Large and Mid-Size Group. The audit approach being employed by the IRS is more detailed and emphasizes the lifestyle of the person being audited.