IRS 'Wealth Squads' On The Way

From Forbes.com:

Those who by anyone’s measure would be considered wealthy should be on notice: How you acquire and now maintain the wherewithal to be so labeled may soon be called into question by the Internal Revenue Service. That’s not to say that the questions can’t be answered and the matter closed with no further tax due, but the means to that end could get complicated.

Last Fall, IRS Commissioner Doug Shulman unveiled his vision for a Global High Wealth Exam Group--the latest addition to the agency’s arsenal of compliance strategies. Its goal is to ensure that these high-end Form 1040 filers are not shirking their federal tax responsibilities. While the exact amount of “wealth” that will arouse IRS interest was not disclosed, the Commissioner suggested a threshold in the neighborhood of tens of million of dollars. According to the most recently released IRS estimates, in 2004 there were approximately 47,000 individual taxpayers with a net worth of $20,000,000 or more.

That some of these taxpayers play fast and loose with regard to federal taxes should come as no surprise, given the deluge of news stories last year revealing the extent to which the well-off in the U.S. as well as other countries secreted assets in offshore accounts to avoid the prying eyes of revenue bodies worldwide. By last November, in the U.S. alone, almost 15,000 individuals had “voluntarily” reported to the IRS previously undisclosed foreign bank accounts.

However, as troublesome as this behavior is, it alone is not the principal factor for this new program. Instead, it is the scope and complexity of the tax planning in which such individuals engage that challenges the current exam strategy and dictates a different approach for certain wealthy taxpayers. Gone are the days when Forms 1040 filed by such taxpayers reported for the most part, wages, dividends, interest, capital gains, and perhaps distributions from a law firm, accounting firm, business partnership, or small business corporation. Instead, they now often reflect the taxpayer’s participation in such ventures as multi-tiered partnerships, trust arrangements, private equity and hedge funds, and private foundations. To complicate matters from an IRS exam perspective, many of these entities in whole or in part are foreign based.