IRS Group Studying Tax Structures Used by Wealthy
By Chris Gaetano
Posted on 8/26/10

As personal wealth and income grow, so does the complexity of their management -- which in turn calls for a greater level of examination at the regulatory level than what would be applied to a more typical taxpayer, said Donna Hansberry, the director of the IRS’s Global High Wealth Group (GHW).

Hansberry, the luncheon speaker at FAE’s Strategic Planning for Your High-Net-Worth Clients Conference on June 22, described to her audience the methods and goals of the GHW group, a part of the IRS’s Large and Mid-Size Business division. The group was formed in October 2009 to provide what she called a more “holistic” approach to reviewing the finances of high-income taxpayers, and is focused not only on an individual’s tax or partnership returns but also on paying attention to more complex structures employed by these individuals, such as trust arrangements, multi-tiered partnerships and private foundations.

Hansberry said that although the group tends to focus on complex financial arrangements, there are not yet specific criteria used by the IRS to determine whether or not someone will be evaluated by her group. This prompted a number of questions from her CPA audience. But other than minimal details, Hansberry stayed mum when asked about the program.

One attendee asked whether wealth or income were the sole criteria for being selected for examination by the GHW group. Hansberry replied: “We look at a number of different things to make the determination,” a response that didn’t appear to satisfy the audience. Other questions were met with similarly few details.

“Promoting voluntary tax compliance of high-wealth individuals is one of the IRS’ top priorities,” Hansberry said in a later interview. “Just as high wealth strategies become more sophisticated, so must the compliance approaches taken by the IRS.”

In the past, said Hansberry, disparate parts of a high-net-worth individual’s enterprise would have been handled by different divisions within the IRS, a return-by-return process that overlooked aspects of the complex financial structures controlled by these individuals.

The GHW group, on the other hand, is designed to take a unified look at the related entities controlled by a single high-income person. The group conducts examinations of individuals using teams composed of revenue agents, international examiners and senior team coordinators, and regularly reaches out to field specialists such as economists, engineers and lawyers for assistance, Hansberry said.

“Going forward, we will take a unified look at the entire web of business entities controlled by a high-wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system,” IRS Commissioner Douglas H. Shulman said at the AICPA’s National Conference on Federal Taxation just after the group was formed. “Our goal is to better understand the entire economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise. We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the entire picture.”

GHW has been focusing its efforts on refining a screening process for the high-net-worth population, developing sound examination practices for cases and identifying alternative treatment and engagement options to encourage greater voluntary compliance, Hansberry said. The GHW group will gradually expand operations as it gains a better understanding of the tax strategies that are used by wealthy individuals. So far, she said, GHW audits have been limited to those with tens of millions of dollars in assets or income.

“This is a learning process,” she said. “As we go along, we’ll gain a better understanding of the [high-net-worth] population.”