Date: Jul 24 2020
In June, the IRS announced that it will begin a new campaign to audit hundreds of high net worth individuals after they reopen their offices on July 15th, 2020. To learn about who should be concerned and what to do, Scott Winget, Enterprise Market Leader for Family Office Exchange interviews Leigh Griffith, a partner with Waller Law. Leigh recently wrote a related article, entitled “New IRS Coordinated High Wealth Audit” which is available in FOX's Advisor Thinking section of the website.
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Listen Now: Scott Winget and Leigh Griffith Discuss New IRS Coordinated High Wealth Audit
Below is a transcript from the conversation:
Scott Winget: Welcome, everyone. This is Scott Winget, the Enterprise Market Leader for the Family Office Exchange. On June 18, 2020, the IRS announced that it's going to begin a new campaign to audit hundreds of High Net Worth individuals after they reopen their offices on July 15. That campaign is being run by the Global High Wealth Group within the IRS and it's often referred to as GHW or simply the “Wealth Squad.” So, to help us understand what that means, with us today is Leigh Griffith, a partner with Waller Law. Leigh just wrote an article on this development, which you can find on FOX's website entitled “New IRS Coordinated High Wealth Audit.” Welcome, Leigh.
Leigh Griffith: Thank you, Scott. How are you today? Thanks for having me.
Scott Winget: Yeah, you bet. What's this all about?
Leigh Griffith: Well, the IRS is relaunching their Global High Wealth audit activity. It started back in 2009 and kind of petered out in the mid-teens - very resource intensive for the IRS, not to mention the taxpayer. These are what are referred to as Enterprise audits; where normally if you audit a partnership, you audit that partnership, or if you audit an individual, you audit that individual to see K1s, W2s, brokerage statements, 1099s, etc. Here they audit simultaneously, more or less, partnerships, trusts, corporations, pension plans, you name it, that an individual is involved with, or a foundation, for example. So, they're all being looked at the same time. If you think about the approach, it would be a large case audit of a large corporation, where they audit all the subsidiaries in the parent. So here, that's what they're doing. The now Commissioner, at the time he was not, back in 2010, identified the GHW audits, as “these are the audits from hell that your grandfather warned you about.” You know, he's now Commissioner, but his view may have changed, or he might even agree that they're the audits from hell; he has a sense of humor.
Scott Winget: Yeah. So why was this relaunched now?
Leigh Griffith: The Inspector General for Tax Administration testified back in 2019 on the tax gap and said that about $456 billion a year of tax is not being collected and reported. So, of that $456 billion, $387 billion was underreporting by taxpayers, with a big part of that being individual taxpayers, and a big part of that being High Net Worth individual taxpayers. There were $39 billion that were from non-filers or just unable to pay. The audits are down 2010 to 2017. The High Net Worth audits were down 63%. Audits in general were down. Auditors were 38% less. So, the IRS has had a drop in activity. The Congress has appropriated additional funds for the IRS. About a year ago they started hiring some folks, and we understand that Secretary of the Treasury Munchin literally told Commissioner Rettig that he needed to get some High Net Worth audits going. The Congress - high net worth right now is not held in high esteem in a lot of places - is putting pressure on, and there’s public pressure. So that's kind of why now. In fact, the Commissioner within the last few weeks has indicated that the IRS is reaching out to the High Income (meaning high gross receipt) individuals who've not filed returns, and they expect to have most of those people to have an encounter with the IRS this year. So that's the drive that's going on, and a lot of activity.
Scott Winget: Wow, so who really should be most in concerned about this? Is there a definition of High Income or High Net Worth taxpayer, or any parameters around these particular audits?
Leigh Griffith: Yes, the traditional definition is $200,000 or more of gross income. You know, the bottom-end scale is not the target here. It's moving up the chain - $2 to $5 million is probably in the range of the minimum interest level. Part of this is that the Inspector General indicated that they got a recovery of about $4,454 per revenue agent hour when they were auditing folks that had income above $2 million, and, even though they're in the ”High Net Worth” definition, $200,000-$400,000 people were only $605 an hour. So, I think in the immortal words of Willie Sutton, “they're going to go to where the money is.”
Scott Winget: Sure. So, I understand the IRS doesn't really even have to contact a taxpayer when they begin one of these High Wealth audits. So, are there clues that taxpayers should be looking for?
Leigh Griffith: Well, the IRS will ultimately contact the taxpayer, but they don't have to tell the taxpayer that they're doing a High Net Worth audit or GHW audit. In fact, in the Revenue Manual chapter that was added in December for these audits, the agents are specifically told not to give the Enterprise audit plan to the taxpayer. The taxpayer will get a bunch of information on exactly, on the taxpayer, what they're looking at, and each separate entity will get some information. But nobody is supposed to be getting the big picture. That's why the taxpayers need to do things, where they can, to develop a big picture; because the IRS isn’t going to do it for them.
Scott Winget: Well, what are some of those things that taxpayers can do proactively?
Leigh Griffith: Well, the first thing I would say is that taxpayers today, before there's a knock on the door so to speak, ought to give a little bit of thought as to what individual or individuals do you want to be your key contact person that will coordinate a response if you have an Enterprise audit. Normally, you see that the individual has their representatives. Partnerships may have different law firms and accounting firms. Trusts, etc. Even if they're all primarily using one law firm, you've got the estate folks in one place and income folks on a different floor, or the accounting firm will have folks in several offices, etc. and they don't necessarily talk to each other. If they don’t talk to each other, and you have an Enterprise audit, you're going to have some problems. So, “Who is going to kind of be the bandleader for you?” Not “Who is the primary person for the first audit?” So that's One. Two: Arrange to be informed with the partnerships, trusts, corporations that you have a significant interest in. If an audit is going to start, learn about it quickly. That’s not exactly something that a lot of folks want to broadcast to their owners, that we’re being audited today. They sometimes drag their feet on that. If you have several partnerships or corporations, trusts, etc., that are starting to be audited through this time, you ought to figure that you're probably one of the ones that's been selected for this kind of audit. And that's even before they knock on the door. They may knock on your door first. If they do, your advisors may know that “gee, this is a bit more detail than normal.” That would also be a hint.
Scott Winget: So, if either by seeing the clues or actually getting contacted by the IRS, they think an audit has begun, is there anything else that they should be doing immediately?
Leigh Griffith: One of the things, when you think you’ve got something like this going on, as again, you get the key person that you picked, whether that be a CPA or a lawyer, to get coordinating, reach out to the folks that are getting the stuff and starting to react to it. A central file ought to be developed for the taxpayer that has all the requests the IRS is making and all the responses that are being given, who gave them, when, etc., and shared with that taxpayer’s advisors. For example, the estate people may give an answer for some entities that are involved in an estate plan that is fine from an estate tax perspective, but not so fine from an income tax, or vice versa.
And the IRS - in that Revenue Manual portion that was inserted in December to say how this is supposed to work - the IRS is supposed to upload the questions and answers within five days of getting them into a share file that is shared by all the different audit teams that's looking at the various entities, trusts, etc., and the council for the IRS. So, your information is centralized. It is supposed to be searchable by keyword. And it is distributed to all the folks who are looking at you and the entities that they say are in your enterprise. You need to be able to do the same. And you need to understand that answering questions in one place may have ramifications in another. And, if people - you know, we're all human, and we focus on what the bone in front of us is and don't really understand necessarily that there are parts elsewhere that my answer can impact, either substantively or optically. Optics is not a word in the Code, but believe me, it is really important.
Scott Winget: Great. So, Leigh, thanks. Where can members go if they want to learn more?
Leigh Griffith: We have a little article on our website. We will be posting the Internal Revenue Manual. Obviously talk to your tax advisers as to what is happening. And the Commissioner’s article that I referred to. He wrote back in 2015-2016 on the GHW audits or the Wealth Squad - was in the Journal of Practice and Procedure, December 15 - January 2016 edition, and that is very much worth reading. He goes through a few pages, just summarizing the kind of questions and information that the IRS is gathering in those audits.
Scott Winget: Okay, great. So, as a reminder, if you want to look at Leigh's paper on this topic, it's called “New IRS Coordinated High Wealth Audit.” That's on the FOX website. You go to Trends and Insights > FOX Resources > Advisor Thinking. And there, there's also a link to the Waller Law website, where you can contact Leigh. So, thanks, Leigh very much. I appreciate your time. Thanks.