The increasing importance of IRS examination readiness.

• Author: Roupas, Peter

The IRS has endured significant budget cuts in recent years. And in today's political landscape, with continuing pressure on lawmakers to reduce federal budget deficits, even more cuts might be coming. Nonetheless, the IRS appears as committed as ever to examining individuals, particularly those of high net worth. Moreover, thanks to the efforts of the IRS's Global High Wealth Industry group (GHW), an IRS exam is likely to be broader in scope, more time-consuming, and more invasive than ever before. Given these recent trends, taxpayers may wish to take a renewed look at whether they are truly examination-ready.

Background

In past decades, when an individual was audited by the IRS, the exam focused on the individual. It was led by examiners specializing only in individual income tax, most likely from the IRS's Small Business/Self-Employed Division. Increasingly, however, the Service has realized that, to gain an accurate picture of a taxpayer's complete income and wealth, it must take a more holistic approach, examining not only the face of the Form 1040, U.S. Individual Income Tax Return, but also the partnerships, S corporations, foreign investments, royalty and licensing agreements, private foundations, and trusts that the taxpayer may control.

One result of this holistic focus is GHW, which was formed in 2010. GHW, which is part of the Large Business and International (LB&I) Division, seeks to make several key improvements to the old way of auditing personal income tax returns. First, the group consists of a broad group of experts, including not only individual tax specialists, but also corporate, partnership, and international experts, economists, and appraisers. As such, the group can better understand the various aspects of a taxpayer's wealth. Moreover, the group uses more-sophisticated methods to perform its risk assessment and to determine the scope of the exam. For example, it electronically matches Social Security and/ or employer identification numbers to connect related entities. Hence, the IRS can identify any entity that is associated with an individual's Social Security number (e.g., the individual is a partner of a partnership, etc.) and may consider including those entities as part of its examination of the individual.

Initially, GHW's progress was slow, and its presence was not keenly felt by taxpayers or practitioners. In the past year or two, however, the group has gained momentum. Consider, for example, that taxpayers...