IRS Targets the Wealthy via Wealth Squad

by M. Robinson & Company, P.C.

IRS operates a Wealth Squad, which brings together teams of IRS specialists to coordinate the audit of wealthy taxpayers. IRS identifies wealthy “targets” with secret algorithms that are skewed against the wealthy. IRS also identifies wealthy “targets” through its investigation of whistleblower claims, received from the IRS Whistleblower Office.

The formal name for the Wealth Squad is the Global High Wealth Industry Group, according to a 2011 article in the Wall Street Journal.  The IRS formed this group in 2009 “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,” according to the Internal Revenue Manual (section

The Wealth Squad does more than review individual income tax returns.  As part of its “case-building” IRS may also evaluate:

  • Corporation Income Tax Returns (Forms 1120 and 1120S)
  • Partnership Income Tax Returns (Form 1065)
  • Estates and Trust Income Tax Returns (Form 1041)
  • Exempt Organization Returns (Form 990)
  • Estate Tax Returns (Form 706)
  • Gift Tax Returns (Form 709).

Where the “target” has foreign income or assets, IRS may also evaluate:

  • Foreign Trusts (Form 3520 and 3520-A)
  • Foreign Disregarded Entities (Form 8858)
  • Foreign Corporations (Form 5471)
  • Foreign Partnerships (Form 8865)
  • FBARs – Foreign Bank Account Reports (FinCEN Form 114)
  • Certain Foreign Financial Assets (Form 8938)

IRS typically begins its audit with a thoughtful, far-ranging information document request (“IDR”). The information requested is highly invasive. A complete response is often very time-consuming. For example, in a typically IDR, the IRS may request:

  • A listing of all domestic and foreign bank statements for all entities controlled by the taxpayer or over which the taxpayer had signature authority, along with documentation regarding the source of funds used to establish each bank account.
  • Documents relating to all entities where the taxpayer was an officer, director, trustee, grantor, beneficiary, signatory over bank accounts, etc.
  • A listing of all recent transfers of wealth between the taxpayer and the taxpayer’s businesses, family members and foreign trusts.
  • A listing of all foreign real estate owned along with the source of funds used in the acquisition of the real estate.

Taxpayers who fail to provide this information in a timely fashion invite an IRS administrative summons, which can be enforced by IRS in the United States District Court. An administrative summons can quickly poison a cooperative relationship with IRS that is essential in bringing the audit to a quick and satisfactory resolution. Thus, an administrative summons should usually be avoided, if possible.

IRS may then insist that the taxpayer participate in an opening interview with two IRS personnel: the Revenue Agent and the Revenue Agent’s supervisor. The supervisor is typically experienced in Wealth Squad audits. The Revenue Agent is typically very well-prepared. The taxpayer’s answers are written down by the Revenue Agent into her laptop and may serve as the basis for a criminal prosecution if the taxpayer is not truthful. Thus, it is essential that the taxpayer and the taxpayer’s representatives be fully prepared. If the initial interview goes well, the case will be “on track” for an early resolution.

For Wealth Squad audits, IRS tracks both “No-Change Rates” and “Productivity Yield: Dollars per Audit Hour.” It follows that the best audit-defense strategy is to quickly determine if the case will likely result in a “no change.” If so, it is often best to cooperate fully with IRS to secure a “no change” with the smallest investment by IRS of tax-audit hours.

For additional information on the IRS Wealth Squad, see the IRS Internal Revenue Manual, Chapter 52: Global High Wealth Industry Processes and Procedures. (4.52.1)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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