6 Reasons the Wealthy Have a High Risk of IRS Examinations

The Wealthy Have a High-Risk of IRS Examinations

The Wealthy Have a High-Risk of IRS Examinations

While historically over the past several years, there have been fewer Internal Revenue Service (IRS) audits of millionaires than years prior, chances are all that is going to change in the upcoming years. That is because the Internal Revenue Service seeks to close the domestic and international tax gaps by increasing the number of audits in examinations of wealthy high-income earners. Oftentimes, the IRS avoids auditing high-income earners because high-income earners generally have high-priced attorneys to fight the IRS tooth and nail. Millionaires and the teams that surround them focus on exploiting ambiguities in the US tax laws, which makes their examinations time-consuming and costly for the US Government. With that said, the IRS intends on moving forward with more high-income earner audits. And, the following specific compliance campaigns listed below place wealthy taxpayers in the direct line of fire of the IRS.

LB&I Campaigns 

The Large Business and International Division (LB&I) at the IRS develops various campaigns designed that enforce various types of tax compliance initiatives. Many of these campaigns involve international-related matters ––and more often than not millionaires are directly impacted.

Here are 6 (of several) currently active campaigns:

Offshore Private Banking

• • • On March 22, 2019, the Offshore Private Banking Campaign was announced.  This campaign addresses tax noncompliance related to taxpayers’ failure to report income generated and information reporting associated with offshore banking accounts.  Treatment streams under this campaign will also address individual FATCA compliance.  FATCA records, including those received under intergovernmental agreements (IGAs), will be reconciled with U.S. domestic reporting.  As part of this process, we will review information exchanged under Model 1 and 2 IGAs. This includes but is not limited to:

      • • identifying omissions (e.g. failure to disclose accounts);

        • identifying account holders from records received with missing information (e.g. taxpayer identification number); and

        • identifying account holders from records received from pooled reporting under Model 2 IGAs.

    • U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. It is not illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these offshore activities.

    • The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

Cryptocurrency

• • • U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations.

    • The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.

High-Income Non-Filer

• • • U.S. citizens and resident aliens are subject to tax on worldwide income. This is true whether or not taxpayers receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or its foreign equivalents. Through an examination treatment stream, this campaign will concentrate on bringing into compliance those taxpayers who have not filed tax returns.

Puerto Rico

• • • This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico”, without meeting the requirements of IRC Section 937, Residence and Source Rules Involving Possessions. As a result, these individuals may be excluding income subject to US tax on a filed US income tax return or failing to file and report income subject to US tax.  This campaign will also address those individuals who have met the requirements of IRC Section 937 but may be erroneously reporting US source income as Puerto Rico source income in order to avoid US taxation. The objective of this campaign is to address noncompliance in this area through a variety of treatment streams including examinations, outreach and soft letters.

Section 965

• • • Pursuant to the changes to IRC §965 under the Tax Cuts and Jobs Act, U.S. shareholders, including individuals, that directly or indirectly own at least 10% of the stock of a specified foreign corporation (SFC) are required to include in gross income their share of the SFC’s accumulated post-1986 deferred foreign income for the last taxable year of the SFC beginning before January 1, 2018, and report this amount on their returns for the taxable year in which or with which their SFC’s taxable year ends (generally, 2017 and/or 2018). The Internal Revenue Service will address noncompliance through soft letters and examinations.

Syndicated Easements

• • • The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions, requiring disclosure statements by both investors and material advisors.

    • This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate.

    • The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax and specifically IRS offshore disclosure.

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