In recent years, the IRS has devoted increasing resources to scrutinizing the tax returns of the very rich. In fact, in a given year, the IRS audits roughly one in four taxpayers with earnings or assets in excess of $10 million. The IRS has its own team of specialists who focus on auditing high net worth individuals and their various holdings. While the IRS calls this group the Global High-Wealth Industry Group, it is known informally as "The Wealth Squad."
The Wealth Squad was formed in 2010 to "take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control." This group focuses its efforts on taxpayers with, at minimum, eight-figure earnings or assets. When elite businesspeople, entertainers, athletes and other high-profile individuals are audited, it is often by the Wealth Squad. As one would expect, Wealth Squad agents are going to be some of the IRS's most experienced, most capable individuals.
Initially, an audit by the Wealth Squad could look like a standard audit. In fact, Wealth Squad agents will be far more thorough and intrusive than agents conducting a standard audit. They are likely to demand extensive documentation within relatively compressed timeframes. Wealth Squad agents will examine every aspect of the high net worth individual's tax returns. The Wealth Squad will also analyze trusts, family or limited partnerships, private foundations, LLCs, corporations and any other structure where a taxpayer has a controlling interest. For these reasons, a taxpayer's asset managers also need to know when the Wealth Squad is undertaking an audit.
What does the Wealth Squad look for?
If a high net worth taxpayer appears to be a "compliance risk", it is likely the Wealth Squad will initiate an audit. Whether a taxpayer constitutes a compliance risk depends largely on algorithms that have been prepared based off of IRS data.
Personal and business aircraft, yachts and other big ticket items are often viewed as a compliance risk, due in large part to large depreciation deductions. Wealth Squad agents are known to delve into all available records, including travel logs, to determine how the aircraft was used and whether such deductions were justified.
Taxpayers facing a Wealth Squad audit are facing off against an elite team of specialists. If you have been selected for audit by the Wealth Squad, you need elite legal counsel on your side as soon as possible. The Manhattan-based attorneys of Goldburd McCone LLP serve taxpayers across the United States and the world in all aspects of tax law.
Sources: You Do Not Want to Be On the Radar of the IRS Wealth Squad, Bloomberg, by Suzanne Woolley, September 28, 2016, Internal Revenue Service Manual Part 4, Chapter 52, Global High Wealth Industry