In a previous blog post we discussed whether high-income and high-asset individuals really face a greater audit risk than taxpayers of normal means. We concluded that individuals reporting eight-figure incomes and greater actually face the highest risk of a tax audit. However, individuals reporting income in the single-digit millions or high six-figures also face a more pronounced audit risk. Unfortunately, wealthy taxpayers not only face a higher likelihood of an audit, but may also face the IRS’s Wealth Squad.

If you are facing the IRS’s Wealth Squad, you probably have complex financial arrangements due to significant assets.  The auditor who handles your case has significant experience assessing complex financial transactions and arrangements. It is highly likely that he or she will be able to determine if your financial arrangements are for valid purposes or exist only on paper to mask an abusive tax avoidance scheme. Our Sacramento tax lawyers explain below.

What Is the IRS Wealth Squad?

The IRS Wealth Squad is officially known as the IRS Large Business and International Division’s (LB&I) Global High Wealth Industry segment. LB&I typically audits entities such as partnerships, S corporations, and other pass-through entities having $10 million or more in assets. Pass-through entities are often favored by the wealthy due to the flexibility in tax planning they can provide. However, the use of such entities can also create the possibility for mistakes and aggressive positions that can lead to tax penalties and other consequences.

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In contrast to the more limited issue-specific audits that are common for taxpayers with straightforward finances, The IRS Wealth Squad will generally take a broad approach to audits. Therefore, the auditor will collect information and look beyond any specific issues to gain a comprehensive understanding of the finances and tax issues. Taxpayers should be prepared for an extensive examination that looks not only at the individual’s or entity’s tax return, but also at income tax returns and other documents from related organizations and entities.

What Is the First Step in a High-Asset Tax Audit?

The initial step in most tax audits is an IRS request for information. Ordinarily, requests for information by the IRS are initially made in the form of an Information Document Request (IDR)—Form 4564. IDRs are required to be “specific, clear, and concise.”  Thus, one would probably be surprised to see the extent of information requested in an initial Wealth Squad IDR. A wealth squad IDR is likely to request documents and information including:

  • All original and amended tax returns for the year under audit and the previous tax year;
  • Identification of all sources of income including the form of payment;
  • Identification of all domestic accounts and assets;
  • Identification of all offshore accounts and assets;
  • Identification of all debts and liabilities owed to U.S. and foreign persons or entities;
  • Any real property the taxpayer owns, leases, or otherwise controls;
  • Information for any entity where you have at least a 20 percent ownership stake, serve on the Board of Directors or similar governing board or otherwise have an interest or control;
  • Identify all transfers of assets or wealth to family members or charities;
  • Provide records of the workbooks and materials utilized in the preparation of one’s taxes;
  • Documents and records concerning all directly or indirectly held REITs, REMICs, FASTITs, CDOs, and other securities, debts, or investments; and
  • Information concerning each associated hedge fund or equity fund associated with the taxpayer.

The above is merely a brief synopsis of the documents the Wealth Squad will typically request. Clearly, the Wealth Squad will request a significant amount of information from a taxpayer. Meeting this challenge requires a careful and strategic approach.

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Can I Get Through a Wealth Squad Audit with “No-Change” to My Taxes?

If there is any silver lining to facing an audit by the IRS’s Wealth Squad, it is the fact that it is indeed possible to make it through a Wealth Squad audit with “no change” to your taxes. In fact, audits of this type are more likely to be resolved with no changes than any other audit type. However, a taxpayer will need to prepare and approach the audit strategically if he or she will achieve this result.

Taxpayers facing an audit by the IRS Wealth Squad or another section can turn to the strategic guidance of the Sacramento tax attorneys at NewPoint Law Group. To schedule a confidential initial tax audit consultation at our Folsom or Roseville, California law offices, call 1-800-358-0305 today.