Introduction
Heeding the howls of Congress and the press, IRS will audit the super-wealthy who use a variety of complicated tax-planning ploys to reduce or eliminate their tax bite.
In a shot across the bow, IRS Commissioner Doug Shulman told the American Institute of Certified Public Accountants to watch out: the agency will be pursuing tax preparers who help taxpayers hide income through complex off-shore structures.
Target
IRS recently formed a new global wealth unit, focusing on individuals worth at least $30 million who are sheltering wealth through convoluted business entities and arrangements. .
The agency will also target corporations engaging in aggressive tax planning using foreign entities and transactions
IRS Unit
IRS will take a unified look at the entire web of business entities controlled by rich individuals, including trusts, real estate investments, hedge funds, royalty and licensing agreements, private foundations and flow-through entities (typically partnerships and limited liability companies).
IExtra agents and specialists, including flow-through specialists and international examiners, will be hired.
Foreign Offices
IRS is opening new offices in Beijing, Panama City and Sydney to track funds flowing out of Europe and into Asia, and vice-versa.
The recent UBS case, in which Switzerland’s largest bank assisted U.S. taxpayers in evading billions in taxes, has provided impetus for the global initiative. Also, IRS will be working in concert with European efforts to crackdown on international tax havens.
CPAs
CPAs were forewarned about increased scrutiny and enforcement efforts. IRS cautioned them to be extra careful when signing off on complex tax strategies or devising such plans; otherwise, the new unit could make them a target as well.
Conclusion
The recent UBS revelations were an eye-opener for IRS and Congress. It is surprising that IRS has not previously employed a unified approach when auditing wealthy taxpayers with multifaceted business structures and foreign transactions.
The lesson: In this era of the global economy, tax authorities need to rethink their traditional approach of examining only a wealthy individual’s Form 1040 and not scrutinizing the underlying sources of income shown on the return, especially when foreign entities and transactions are implicated.
