IRS Increases Auditing for High Net Worth Individuals

The IRS has announced plans to increase audits on high net worth individuals. This group of taxpayers has been negligent in paying taxes, racking up a substantial tax bill. According to the notice, the IRS will begin sending audit notices to high net worth individuals when they return to work on July 15.

“A recent report issued by the Treasury Inspector General For Tax Administration concluded that high-income non-filers accounted for about $45.7 billion in tax due,” Jennifer Benda, a partner/shareholder at law firm Hall Estill, tells GlobeSt.com. “The IRS has determined that an efficient way to increase enforcement and collection and reduce the tax gap is to focus on the high-income non-filer category.  The report stated that TIGTA was concerned that the IRS had identified high-income non-filers and shelved the cases.”

The term “high net worth” is a vague category with no formal description. Instead of earnings, the IRS will focus on the tax bill. “There are no formal monetary figures but the TIGTA report focuses on tax returns with more than $100,000 of tax due.  The IRS is also focused on taxpayers with related entities, including trusts and private foundations,” says Benda.

The audits could go back as far as six years for high income earners who failed to file a tax return, and back to 2016 for those that did. “IRS officials recently stated that hundreds of high-income audits would begin when the IRS begins returning to the office in July,” says Benda. “For filed returns, the audits would likely cover the 2016 through 2018 tax years. For non-filers, the IRS will likely cover the entire non-filing period, or at least six years.”

Real estate holdings could be a flag, particularly for non-filers. “Any non-filer can expect some attention from the IRS under this initiative,” says Benda. “Any HNW individual with real estate holdings could be captured by this initiative, either because of the amount of potential tax due—over $100,000—because of flow-through income from related entities, or because of participation in a disfavored transaction, such as conservation easements or captive insurance arrangements. The IRS is also focused on proper reporting of cryptocurrency transactions.”

High net worth individuals who are concerned that this audit campaign could impact them should reach out to a professional. “The failure to file a return is a crime.  If returns have not been filed, a HNW individual should consult with a tax attorney to develop a plan for becoming compliant,” says Benda. “For filed returns, if aggressive tax planning has been used or there has been potential underreporting of income, it would be wise to seek an independent review of your filing positions. Upon that review, a tax advisor maybe able to recommend measures to mitigate risk of large adjustments and penalties on audit.”

Overall, taxpayers should have and provide documentation to combat an audit. “For someone with sound returns, preparing for audit involves making sure you have complete documentation to provide to the IRS to substantiate the income and expenses reported on the return,” says Benda.