A year and a half ago, in the fall of 2009, the Internal Revenue Service created a special new unit to examine "high wealth individuals" and the extent to which they were complying with the tax laws.

In an October 2009 speech announcing the new program, IRS Commissioner Douglas Shulman said that the purpose of the Global High Wealth Industry Group (GHWIG) was to "centralize and focus the IRS compliance expertise" on "high wealth individuals and their related entities." To give prominence to this program direction, the new agency organization was established as an entire "industry" group. The five other industry groups cover large businesses in vast areas such as all of the financial sector, or all industries within heavy manufacturing and transportation, or everything within healthcare, pharmaceuticals, food and retailing (see earlier TRAC report).

While the creation of this new group appeared to signal that the IRS was going to launch an aggressive effort to single out high wealth individuals for special attention, very timely agency data shows that so far this has not been the case. In fact, through the end of March 2011, the information obtained by the Transactional Records Access Clearinghouse (TRAC) under the Freedom of Information Act (FOIA) shows that GHWIG has only managed to audit a handful of tax returns in its first 18 months: two (2) in fiscal year 2010 and only eleven (11) during the first six months of FY 2011 (see Table 1).

By comparison, all of the groups located in the Large Business & International (LB&I) Division — generally responsible for large businesses with assets of $10 million or more — examined 42,835 returns in FY 2010 and by the end of last month so far had audited 29,688 returns during the current fiscal year.

It is also clear that despite the agency's somewhat assertive rhetoric, the IRS has very modest hopes for this new unit in FY 2011. This conclusion is based on an examination of two factors: first the number of revenue agents it has allocated to the unit compared with the rest of the LB&I Division and second, the administrative goals it has set for returns it expects the unit to examine.

Revenue Agents. For the whole LB&I Division, at the beginning of FY 2011 there were a total of 5,655 revenue agents assigned to the organization. By comparison, only 78 of these agents were assigned to the Global High Wealth Industry Group. Table 2 provides a breakdown of these agents by their assignments.

While it obviously takes time to build any new unit, given the agency's rhetoric this modest size is still surprising. This is especially true in light of the increasing number of revenue agents on the IRS payroll. Last year the IRS reports these full-time (FTE) agents grew by 11 percent.

IRS FY 2011 Targets. While it is likely the IRS is planning to expand its audit goals in the future, at least for now they are very skimpy. In its 12-month target for all of FY 2011, the agency called tor the audit of only 122 returns.

To understand the significance of this count it is necessary to consider the following. The number of high wealth individuals who might be subject to these new in-depth audits is not known. Since such individuals often create separate business entities for their different tax purposes — and recalling that an examination of this kind often must cover more than one year — it seems likely that as currently planned the new project will involve a very small number of taxpayers. For example, IRS's coordinated industry case program where inter-related companies were examined together typically reported something on the order of 10-15 returns per case.

Of course, high wealth individuals — just as any taxpayer — can be subject to an audit of their 1040 return by IRS's Wage and Investment Division or by its Small Business/Self Employed Division. IRS's statistics indicate that 1 out of every 12 individuals with total positive income of $1 million or more were audited through these regular programs during FY 2010. While the number of these examinations was up last year, this still left the returns of 11 out of 12 millionaires unexamined. And it should be noted, that of those audited about half received a very limited correspondence review on which the examiner spent just 1.8 hours on average to complete.

The Publicly Stated Objective. In a December 2009 speech to the 22nd Annual George Washington University International Tax Conference where the purpose of the GHWIG was further described, Commissioner Shulman said that the high wealth individuals he was targeting were "not your typical Form 1040 filers with a W-2, some 1099 income, and maybe a Schedule C enclosed with their return. Their tax picture is much more complicated and nuanced."

He added that "[f]or a variety of reasons – including valid business reasons — many high wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are entirely above board. Others mask aggressive tax strategies."

He also noted that initially the IRS would look at individuals with tens of millions of dollars of assets or income. Going forward, he said, "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."

In a more recent speech to the New York State Bar Association Taxation Section Annual Meeting, Shulman said the GHWIG was "a game-changing strategy for the IRS" that will give the agency "a unified look at the entire complex web of business entities controlled by a high wealth individual."

Whatever the GHWIG has so far actually accomplished, the creation of the new unit has caught the attention of some tax lawyers. A "Client Alert" issued by the law firm Morrison & Foerster LLP asserted that IRS Commissioner Shulman "has essentially declared audit war on what are likely to be in many instances legitimate tax savings structures."

The director of the new IRS group is Donna Hansberry. According to a trade organization newsletter, Hansberry was asked at at a conference in June 2010 whether wealth or income were the criteria of whether an individual might be subject to examination by her group. "We look at a number of different things to make that determination," she said. In a later interview, Hansberry noted that promoting voluntary compliance by the wealthy was a top priority of the IRS. "Just as high wealth strategies become more sophisticated, so must the compliance approaches taken by the IRS," she said.

High Wealth Group Fails to Meet Its Very Modest Targets

In addition to the unusually timely audit counts, the copies of IRS's internal monthly "report cards" provided TRAC also have information about how well or poorly the different industry groups within the LB&I Division are achieving their official audit targets. According to these measures, reproduced in Table 3, the Global High Wealth Industry Group so far is not doing well. For the first six months of FY 2011:

• GHW had completed auditing only 8 individual (1040) and small business (1120) returns by the end of March. This meant that for these six months the group's performance was about one-third (36%) of its target.


• GHW's record for auditing partnership returns was worse. In this area, only 3 out of the goal of 29 (10%) were completed.


• GHW had failed to complete any audits of the returns for other types of business entities thus meeting zero percent of its goals.

Overall, the report card found the GHWIG was in the "red zone." That is, it was seriously behind in meeting its examination targets for the first half of FY 2011 with only 19 percent of its audit objectives met.