Top 1% of wealthy taxpayers failed to report 20% of their income
IRS Creates Wealth Squad
IRS Commissioner Charles Rettig has requested that Congress increase the IRS’s budget. Rettig has stated that for every 1% improvement in voluntary compliance, annual revenue could be expected to increase by approximately $30 billion per year. 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.
The IRS’s “Wealth Squad” (officially named the Global High Wealth Industry Group program) targets both high-net worth non-filers and high-net worth filers who have implemented sophisticated and complex structures or abusive tax transactions.
These wealthy individuals often use foreign financial assets or bank accounts to conceal their income from U.S. taxation. The United States is the only major nation that taxes its citizens (and green card holders) regardless of where they live. The wealthy have been found to have the means to use their vast financial resources to avoid U.S. taxation. So long as you hold a U.S. passport or green card, the Internal Revenue Service wants its cut of your profits and capital gains.
IRS Global High Wealth Industry Group – Its History
While it sounds encouraging that the IRS will “go after” these individuals to have them pay their fair share, the Global High Wealth Industry Group is not a new IRS program. It was formed in 2009 (thirteen years ago). The Internal Revenue Manual added Section 4.52.1, Global High Wealth Program Processes and Procedures, in 2013 (four years after the implementation of the program) and 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”. Not sure what the IRS means by “taking a holistic approach”. Generally such an approach means looking at the bigger picture and thinking outside the box.
Per the AICPA’s Tax Advisor publication, 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”. Per the Tax Foundation, an organization that monitors the tax policies of various taxing agencies, including the IRS, in 2017 the IRS collected $618 million in individual income taxes from the 1% wealthiest taxpayers. Simple math: $175 billion in uncollected taxes over $618 billion in collected taxes equates to 28%. Why are there limited resources one could ask when so much in revenues is at stake? To be fair to the IRS, the strategies used in international tax planning are very sophisticated and likely only a few agents, with many years of training and experience, are qualified to identify these schemes. The IRS may also need the cooperation of foreign governments who posture themselves as tax havens for the rich.
IRS Global High Wealth Industry Group – Its Future
Whereas the IRS had traditionally focused on auditing the tax returns of high net-worth individuals, it now plans to focus more on high net-worth nonfilers. The IRS’s case inventory can come from many sources. These include referrals from other IRS groups, whistleblower claims, 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.
The AICPA article goes on to state “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 (emphasis added). Technology, including the use of data analytics and risk assessments, is another important area in which efforts are being focused.”
Unlike a typical audit of Form 1040, the examination team needs to have the expertise to deal 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, foreign entities, etc. Thus, the examination team will use other IRS resources such as cross-border and financial products experts, engineers, and appraisers. Depending upon the initial findings of the Wealth Squad, IRS Counsel and personnel from the Office of Fraud Enforcement, the Office of Promoter Investigations, and the Criminal Investigation Division may be involved.
If a wealthy taxpayer is contacted by the IRS and has not reported all of their income or has not filed tax returns, be assured that the IRS has already performed a significant amount of due diligence in building its case file against that person.
Tax Tip #1
For those taxpayers who have been playing the “audit lottery game,” keep in mind that the failure to report income, particularly income from foreign sources, can result in VERY significant penalties. Accordingly, it is generally prudent to get into compliance voluntarily, before the IRS contacts you. If there is potential criminal exposure due to fraud, the IRS voluntary disclosure program may be the best option. It is advisable to speak with an experienced tax attorney to discuss the best course of corrective action. If your tax professional is not an attorney, be sure to discuss the use of a Kovel letter to protect your privileged communications.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.