Auditor

The IRS is Targeting High Net Worth Individuals with More Audits. How to be Prepared.

In late 2020, the IRS announced its campaign that would focus on auditing high-net-worth individuals’ income tax returns. This article will go through who may be targeted by this initiative and some areas that are likely to be examined under audit. While there has been scrutiny surrounding this initiative, this is not the first time that the IRS has launched an initiative like this. For the current campaign, the periods targeted in this initiative are believed to be from 2014 to the present.

Who Are High Net Worth Individuals?
While there is no statutory definition of who can be classified as a high-net-worth individual, it is common practice among financial professionals to identify those who have a tax liability above $100,000 as those that would fall within this category.

While this campaign is newly focused, is not the first of its kind. The IRS has had a global high wealth program or “wealth squad” focused on high-net-worth individual audits for some time. This group is known for taking a holistic approach to these taxpayers and looks at the complete financial picture of the taxpayer, including any partnerships, trusts, private foundations, corporations, or other relevant interests. Under the current plan, the IRS’s Large Business and International Division will focus on taxpayers who are considered high-net-worth that have significant pass-through activities and/or those that may have seen substantial tax savings under the Tax Cuts and Jobs Act (TCJA).

Planning and Reacting to Audits
If you are concerned about a potential audit, we recommend proactively cleaning up any books and records, organizational charts, and records for personal and charitable activities. We generally recommend that all documentation related to your tax return be retained for a minimum of three years, and ideally for seven years. A review of documentation and records by your HBK Tax Advisor can ensure audit preparedness.

If your return is ultimately pulled for an audit, be prepared to provide some of the following documentation:

  • Foreign Asset Information, including bank account information, foreign trusts, business interest, inheritances, and other foreign activities;
  • Related Entity Information, including trusts, partnerships, corporations, and S-corporations that are commonly owned, or owned by children and/or spouses;
  • Gifting and Estate Plans; and
  • Private Foundation Information.

These documents can take time to compile so being proactive and having them organized and readily available will save time and expense. If you receive an audit request, or other communication from the IRS, be sure to communicate with your HBK Advisor as soon as possible. Audits and notices have specific deadlines that will need to be met.

We can assist all individuals through all stages of audit preparedness, including the ability to perform a pre-audit review of all tax matters, allowing you to understand any potential risk areas in your tax compliance history. Please reach out to your HBK Advisor for more information.

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About the Author(s)

Sarah N. Gaymon, CPA
Sarah Nicole Gaymon, CPA is a Senior Manager in the Tax Advisory Group at HBK CPAs & Consultants located in the West Palm Beach office providing trust and estate support services for the CPAs in all HBK offices. Sarah’s specialty and focus areas include tax compliance and tax consulting for high net worth individuals, family groups, trusts, estates, and gift tax issues. In addition, Sarah specializes in fiduciary accounting for trusts and estates.

Sarah regularly consults on family wealth, succession and estate planning. She also has experience in US planning and compliance related to foreign trusts, foreign estates, and individual foreign tax compliance and residency issues.

Cassandra Baubie, JD
Cassandra Baubie is an Senior Associate at HBK CPAs & Consultants and is a member of its Tax Advisory Group (TAG). Cassandra joined HBK in 2017. She works in the firm’s Youngstown, Ohio office. She has experience in tax law research and writing. Prior to joining HBK, she worked for Jurist.org, a global legal news organization, and was a member of the University of Pittsburgh Tax Law Review Journal. Cassandra also worked for the University of Pittsburgh School of Law’s Low-Income Tax Clinic where she performed IRS litigation and Tax Court work and provided compliance work for low income individuals and businesses. Cassandra focuses on issues pertaining to State and Local Taxation (SALT), as well as flow through entity taxation. She has been involved in numerous sales and use tax, franchise tax, and corporate income tax audits, VDA’s, and refund requests. She focuses on complex sales and use tax compliance planning, nexus studies and on-site review and training for all SALT related issues, and has managed various engagements as the in-charge team member and has significant experience in multi-state tax issues.

Hill, Barth & King LLC has prepared this material for informational purposes only. Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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