IRS Sets Its Sights on High Net Worth Taxpayers
The Internal Revenue Service will start examinations of several hundred high-net-worth (HNW) taxpayers beginning July 15. These audits will address partnerships, private foundations (PFs), trusts and other matters for sophisticated individual taxpayers. With a coordinated IRS campaign, HNW taxpayers can expect aggressive IRS audits.
Partnerships and Other Passthroughs. The IRS will likely target HNW taxpayers with partnerships and other pass-through entities. Exams will address taxpayers with pass-through structures, such as partnerships, S corporations and disregarded entities. The Bipartisan Budget Act of 2015 overhauled the partnership audit rules to make it easier for the IRS to audit partnerships and collect tax from those audits.
Private Foundations. IRS examinations are expected to include individuals with PFs. HNW individuals and families utilize PFs to facilitate charitable giving and charitable activities. The tax rules governing PFs are complex. PFs are subject to several excise taxes and compliance requirements to ensure that PF assets are devoted to charitable purposes and to ensure that disqualified individuals don’t obtain certain prohibited personal benefits.
Multi-jurisdictional Families. Individuals with non-U.S. assets and income are subject to special tax and reporting requirements for offshore accounts and assets. The IRS has focused enforcement efforts on taxpayers with offshore bank accounts, assets and structures for several years. Reporting and compliance for these assets can be a trap for the unwary, especially for taxpayers living outside the United States, globally mobile individuals and multi-jurisdictional families. The IRS maintains a voluntary disclosure practice for individuals to regularize non-compliance with US international tax and reporting obligations.
TCJA Examinations for Individuals. The 2017 Tax Cuts and Jobs Act (TCJA) made major changes to the taxation of HNW individuals with international assets and activities. Many of the changes had a disproportionate impact on HNW individuals, including the rate structure of the Internal Revenue Code Section 965 transition tax, global intangible low taxed income and limits on available deductions. In May, the IRS announced a TCJA campaign and stated that “[t]he goal of this campaign is to identify transactions, restructuring and technical issues and better understand taxpayer behavior under the new law.” HNW individuals should be prepared to address TCJA tax issues and related planning during the coming cycle of examinations.
How Can Taxpayers Prepare? HNW individuals should be prepared to address issues relating to their sources of income, estate planning, foreign financial accounts, gifts to family members, assets transferred to PFs or charitable organizations and to identify assets they own both within and outside the United States. Increased scrutiny of IRS audits of HNW individuals make it extremely likely that the IRS will consider increasing enforcement measures.
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