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Home Newsletter IRS to focus on high net worth individuals

IRS to focus on high net worth individuals

The organization plans to look into real estate holdings as well.

The Internal Revenue Service (IRS) recently announced it will audit high net worth individuals—including real estate professionals, GlobeSt.com reports. The IRS is focused on those who’ve been negligent in paying taxes and will start to send audit notices to these individuals when employees return to work this week.

The IRS has a specialized, experienced group of examiners on hand who solely focus on auditing high-income and high-wealth taxpayers, according to law firm Winston & Strawn attorneys Richard Nessler and Lawrence Hill. The Global High Wealth Industry Group, also known as the IRS “Wealth Squad”, is trained to examine complex domestic financial affairs, offshore accounts, foreign trusts and any entities the taxpayer controls such as partnerships, trusts, foundations and corporations.

“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 and shareholder at law firm Hall Estill, told 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 IRS has not put out a formal definition a “high net worth” individual, but it’s likely to focus on people’s tax bill rather than their earnings, according to GlobeSt.com.

“There are no formal monetary figures but the TIGTA report focuses on tax returns with more than $100,000 of tax due,” Benda said. “The IRS is also focused on taxpayers with related entities, including trusts and private foundations.”

Audits could go back as far as six years for high income earners who did not file a tax return, and back to 2016 for those who did. According to Benda, audits would likely cover the 2016 through 2018 tax years for filed returns.

Real estate in the IRS’ sights

Any real estate holdings could be a red flag, especially for non-filers, according to GlobeSt.com. High net worth individuals with real estate holdings could be a part of the initiative, either due to how much taxes they owe, typically more than $100,000 or because of income from related entities. Taking part in disfavored transactions like conversion easements or captive insurance arrangements could also result in an audit. Benda also noted the IRS is focused on proper cryptocurrency transaction reporting.

High net worth individuals who are worried about being audited are encouraged to contact a tax professional.

“The failure to file a return is a crime,” Benda told GlobeSt.com. “If returns have not been filed, a HNW individual should consult with a tax attorney to develop a plan for becoming compliant. 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 may be able to recommend measures to mitigate risk of large adjustments and penalties on 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.”

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