IRS Announces Plans to Increase Audits on High-Net-Worth Individuals and their Related Entities

At the end of June, the Commissioner of the IRS Large Business and International Division announced a new campaign to audit high-net-worth individuals and the entities (such as partnerships, corporations, trusts, and private foundations) associated with them. The audits will be conducted, along with coordination with other divisions, by the Global High Wealth Industry Group (known as the “Wealth Squad”), a division of the IRS that was formed to look holistically at high-net-worth individuals in conjunction with entities that they control. The IRS plans to initiate hundreds of new audits between July 15 and September 30, 2020.

In conjunction with this announcement, the Commissioner of the Tax-Exempt and Government Entities Division (“TE/GE”) of the IRS confirmed that she anticipates increased audits on private foundations. The IRS has indicated that more than 1,000 private foundations with links to high-net worth individuals have been identified and will be examined, and the TE/GE division has substantially increased its training regarding the use of private foundations in tax planning.

Private foundations and high-income individuals with a connection to them should anticipate the following issues may arise through an audit and prepare to address them:

• Prohibited self-dealing: The IRS has indicated that investigating any self-dealing (such as loans to disqualified individuals) will be a particular focus for private foundation audits.
• Failure to file: A recent report published by the Treasury Inspector General for Tax Administration indicated that many high-net worth individuals have not filed tax returns on time or have failed to file at all. Investigation of non-compliance with filing requirements will likely be a focus of the campaign.
• Foreign assets: In the past, the IRS and the Wealth Squad specifically, have focused their enforcement efforts on foreign assets, bank accounts, and other foreign entities. Individuals with foreign assets are sometimes subject to special tax and reporting requirements, some of which were changed under the 2017 Tax Cuts and Jobs Act, and compliance with these will likely arise in an audit.