March 15, 2011

IRS Nearly Doubles Audits of Wealthy’s Tax Returns

New approach views returns as ‘entire picture’ instead of individually

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High-net-worth individuals be warned: the IRS is watching. And it’s not doing it return by return any longer; it’s looking at the big picture instead of one-offs, resulting in a rate of audits of the wealthy that nearly doubled in 2010. Detailed information about the rates of audits and their results was released Monday in the 2010 IRS Data Book.

The overall odds of any given taxpayer being audited by the IRS were one in a hundred in 2009, according to a Bloomberg report. But in 2010 that changed, with the overall rate edging higher to an overall rate of 1.11% of taxpayers being audited. But the high-net-worth? Those odds have increased, so that now anyone with an income above $10 million is looking at an audit chance of 18.4%, up from 10.6% in 2009.

How did that happen? Well, George Clarke, an attorney at Miller & Chevalier Chartered in Washington, offered an opinion in the report. He explained that as part of its investigation into offshore tax shelters and bank havens, as well as its voluntary disclosure program for wealthy taxpayers who were willing to ’fess up to having used such strategies, the IRS learned a lot about how the HNW approach asset management. “They learn things and then they roll those things out across the board,” he was quoted as saying.

That’s all part of the plan, according to IRS commissioner Douglas Shulman. After the creation of the IRS’s Global High Wealth Industry Group, he said in a speech before the New York Bar Association Taxation Section, “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.”

He added, “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.”

Earlier this month the IRS rolled out information on the 2011 offshore voluntary disclosure initiative in eight languages, for taxpayers and preparers whose native language may not be English. Penalties for the 2011 program, it says, are higher, but it “offers clear benefits” that include possible avoidance of criminal prosecution.

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