In recent years, the IRS has stepped up audits of high-net-worth (HNW) taxpayers. The agency's Global High Wealth Industry Group (GHW Group) focuses exclusively on HNW taxpayers.

The GHW Group's goal is to take a holistic approach to HNW taxpayers by considering their complete financial picture. The group often begins examinations by identifying taxpayers who are a high compliance risk. This can come from one document, such as a tax return for a single year.

One piece of information the IRS doesn't make public is the exact computation the agency uses to determine compliance risk. The IRS generally doesn't release these details, although in 2023 the agency did state that it planned to increase its use of data analytics to better flag returns that had the highest risk of noncompliance.

When the GHW Group requests an examination or audit of a taxpayer's records, this doesn't automatically mean a taxpayer is in trouble or has made a mistake. It simply means the group has identified a discrepancy or other issue and is seeking clarification.

Have the Evidence

One of the best ways to navigate an examination or audit is to have comprehensive documentation. That a taxpayer has a complex, diverse portfolio of assets doesn't reduce the need to be able to provide documentation to support claims made on tax returns.

While taxpayers must be able to provide documentation for all information included on their tax return, these areas are especially important:

• Foreign accounts
• Partnerships
• Complex investment vehicles
• Charitable donations
• Large gifts or bequests

What is an IDR?

Information gathering usually takes the longest time for any examination or audit. As the GHW Group falls under the IRS's Large Business and International (LB&I) Division, the group follows that division's procedures. This includes an Information Document Request (IDR), which is a form the IRS uses to request information from taxpayers.

HNW individuals can potentially streamline the process by being actively involved in the IDR process. This can help streamline the investigation, reduce repeated requests for documents, and potentially prevent later confusion.

While the GHW Group must follow the law and IRS procedure, each examination and audit is an individual case. Building an effective strategy for a taxpayer's specific situation is crucial when navigating a wealth management audit.

If you're a HNW taxpayer who is facing an audit or has other questions related to taxes, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.