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February 23, 2010

IRS Launches High-Wealth Task Force and Prepares Audits

On Oct. 26, 2009, IRS Commissioner Douglas Shulman announced the creation of a new specialized industry group to target high-wealth individuals. Surprisingly, this Global High Wealth Industry Group will be housed within the Large and Mid-Size Business (LMSB) Division, and the IRS is planning a number of examinations to test the program. According to Shulman, many other countries already employ specialized task forces to pursue their wealthiest taxpayers. The idea is to centralize IRS compliance efforts for high-wealth individuals because the IRS has to look at sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. The task force will take a unified approach to its audits by focusing on the entire web of business entities controlled by a wealthy individual, including issues involving offshore structures, income sources and tax residency.
The IRS has ostensibly been targeting high-income taxpayers all along, but Shulman seemed to indicate in his comments that current IRS efforts typically involve identifying single returns for audit based on the usual scoring systems for audit selection. The new program would instead look at everything that may be connected to a single taxpayer, including trusts, private foundations, partnerships, equity-sharing arrangements, royalty and licensing agreements, and privately held and related entities where the taxpayer may have actual or beneficial ownership. The IRS has already hired flowthrough specialists and international examiners for the team and is considering adding economists, appraisal experts and industry specialists.
The IRS has not yet settled on a formal definition of high-wealth individuals, but Shulman specifically noted that other countries have often drawn the line at $30 million. He said the IRS will initially focus on individuals with “tens of millions of dollars” in assets or income.

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