During 2009, the IRS announced the creation of a Global High Wealth Industry Group, or GHWG, to increase its focus on matters related to high-income taxpayers and their related entities, and to strengthen the rigor of its audit processes in this taxpayer segment. This group is also known as the IRS Wealth Squad.

When asked why the IRS created the GHWG, then-Commissioner Douglas Shulman said, “For a variety of reasons — including valid business reasons — many high wealth individuals make use of sophisticated financial, business and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies.”

IRS states that the unit was formed to take a holistic approach to addressing the GHWG taxpayer population by looking at the complete financial picture of high wealth individuals and the enterprises they control. The GHWG targets individuals with assets or earnings of tens of millions of dollars. The complex legal structures utilized by these taxpayers for their domestic and foreign business and investment activities have driven IRS to launch the GHWG, which uses a comprehensive and integrated type of review led by sophisticated and specialized IRS representatives, including forensic accountants.

Although the IRS doesn’t publish detailed information about the activities of the GHWG, IRS has stated that the focus on high income taxpayers and tax evasion will continue with its increased focus on foreign income and information reporting through FATCA and FBAR compliance monitoring.

The Wealth Squad, or as others call it the SWAT team, analyzes a taxpayer’s individual income tax return and related entity income tax returns where the taxpayer has a controlling entity interest and significant compliance risk is deemed to exist. This leads to a more complete financial picture of the taxpayer and the enterprises that the taxpayer controls (including partnerships, trusts, Subchapter S corporations, C corporations, private foundations, etc.).

IRS has its high wealth taxpayer population identified and utilizes mathematical modeling to determine the examination potential of high wealth individual taxpayers. It assesses the level of compliance risk contained in filed returns. Returns with the highest risk indicators will more likely be selected for audit. The Wealth Squad specialists determine the selection criteria and draw on resources throughout all of IRS, including the criminal investigation division.

Wealth Squad audit triggers include transfer tax issues such as estate, gift and generation-skipping transfer taxes; valuation issues; executive compensation; noncash charitable contributions; partnership and limited liability company issues; passive activity losses; foreign trusts; foreign bank account reporting; and overly aggressive tax strategies.

As with other civil tax examinations, a taxpayer will know that she is being audited by the Wealth Squad because a revenue agent will identify himself as an agent for the group via phone or correspondence to schedule an initial appointment.

Documentation

IRS usually conducts its information gathering process through Form 4564, Information Document Request, or IDR. IRS has the authority to collect evidence and request information during the course of an examination. IRS may also issue a summons if the taxpayer fails to respond to an IDR. IRS can summons books & records of the taxpayer, any person having custody of records, or anyone that can ascertain the correctness of the taxpayer’s return, or determine the tax liability of a taxpayer.

Some audit techniques used by the Wealth Squad are: interviews, tours of business operations, examinations of books and records, analysis of tax schedules, balance sheet analysis, review of gross receipt or sales, review of cost of goods sold and testing expenses.

Wealth Squad IDRs are known to be exhaustive. Some examples of requested information are original and amended returns, reconcilement and explanation of all adjustments, identification of all sources of income, identification of all U.S. and non-U.S. assets, identification of all liabilities and identification of properties owned directly, indirectly, leased or rented.

The IRA wants taxpayers to fully describe responsibilities with U.S. or foreign entities where the taxpayer owned at least 20 percent of capital, 20 percent or more of profit or losses, was a trustee or acted in a fiduciary capacity, was a grantor or beneficiary, had a nominee acting in their capacity, was on a board of directors, was an officer or had signature authority, was a surety for or guaranteed debt.

For any of those, provide identification of each and every current and former officer, trustee and manager; all the records regarding their appointments, resignation or terminations; records regarding the transfer of assets or ownership, statements explaining the purpose of the entity, bank statements for all accounts including foreign accounts, records to establish basis of assets, records for sales and copies of contracts.

In addition, copies of all financial and brokerage account statements, asset transfers to relatives and charitable organizations, tax preparation work copies, organizational charts, tax opinions, fees paid for estate planning, cross-border and offshore transactions and documents for derivatives and hedge funds also must be provided.

Underreporting income or not reporting reportable income, including income from offshore accounts, is a path to alerting the Wealth Squad. Don’t be a victim of your own making. If you are a high net worth individual, consult your tax specialist if you receive a Wealth Squad notice or if your tax returns are at risk for noncompliance.