Back in 2009, the IRS formed the Global High Wealth (GHW) unit focusing on taxpayers who had elevated income and a complexity in their financials that warranted a “holistic approach.” From 2009 through 2022, our seasoned partner Tony Kim served as one of five IRS attorneys working to support this new unit. He found that understanding how a web of partnerships, domestic and foreign trusts, offshore accounts and corporations linked to reveal a GHW taxpayer’s true taxable income was no easy task. But, the IRS first had to find these dots to connect them.
The IRS’s Data Book shows that the agency struggled with GHW audits. IRS Data Book Table 17. As of fiscal year 2010, 13,322 tax returns were filed by taxpayers who had total positive income of $10,000,000 or more – that’s the range to fall within this GHW population. IRM 4.52.1.2. From that number, 21.5% of the returns were audited with an average recommended adjustment of $610,397. Fast forward to fiscal year 2019, where the number of GHW tax returns filed grew to 24,457, resulting in just 10.2% audit coverage with an average recommended adjustment of $49,805. If the GHW division was a stock, we’d probably sell and take a loss. Before we do, let’s look under the hood for a moment.
In building a GHW case, the IRS prepares a review a “yK-1 analysis” for each taxpayer to gain an overview of the taxpayer enterprise that includes the taxpayer’s Form 1040 and all related entities. From this interactive link analysis of the GHW taxpayer and all of their web of entities, the IRS could then review the entire enterprise and consider how to build the case. IRM 4.52.1.1.5(1); IRM 4.52.1.3. The trouble with building this yK-1 analysis is that the IRS needs information on a GHW taxpayer’s web of entities. And, a GHW taxpayer’s ownership information in various entities is elusive.
The GHW unit’s audit results may increase dramatically in the coming years due to the recently enacted Corporate Transparency Act (CTA). Congress added the CTA section, 31 U.S.C. § 5336, to the Bank Secrecy Act to address the broader objectives of beneficial ownership transparency. The CTA requires certain types of domestic and foreign entities, called “reporting companies,” to submit specified beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, that is charged with safeguarding the U.S. financial system from money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence. All of the information that connects GHW taxpayers to their holdings so critical to a yK-1 analysis will soon become available to the IRS beginning in 2024 when taxpayers are required to file BOI reports with FinCEN. The CTA provides, “[b]eneficial ownership information shall be accessible for inspection or disclosure to officers and employees of the Department of the Treasury . . . .” Couple the CTA with the additional funding provided by Congress in the Inflation Reduction Act that will lead to the hiring of more revenue agents and you have the stage set for quite a dramatic change to the landscape of GHW taxpayer audits beginning in 2024.
Conclusion
The IRS is becoming a data-centric organization. By mining ever greater sources of data, the IRS can more effectively select taxpayers for audit. And the adjustments resulting from those audits will be larger. The new beneficial ownership information reports are a source of valuable information for the IRS. The IRS is likely to use information gleaned from beneficial ownership information reports to select and prosecute audits. Experienced counsel can help you navigate both IRS audits and the new beneficial ownership information reporting requirements.