Tips to Prepare for IRS Examinations of High-Income Earners in Fall 2020

In a webcast hosted by New York University’s School of Professional Studies in August 2020, the Commissioner of the IRS Large Business and International Division announced it will begin examining tax returns of hundreds of high-income earning individuals and private foundations in the coming months. The IRS shared, “individuals with assets or earnings of tens of millions of dollars,” are a key focus of the new campaign.

The IRS will use data analytics to coordinate examinations and identify those engaged in what it deems to be aggressive tax strategies.

While the IRS has yet to commence this new campaign, impacted individuals and any associated entities may benefit from proactively preparing for potential examinations.

Tax Gap

This initiative appears to be a reaction to various factors—including the increased deficit resulting from the COVID-19 pandemic—and will focus its approach in two areas.

The first will be increased examinations of high-income earners and private foundations.

The second comes from a Treasury Inspector General for Tax Administration (TIGTA) report showing high-income nonfilers account for a vast majority of the $37 billion tax gap. The report states, “IRS identifies nonfilers by analyzing taxpayers’ prior year filing history,” and will, “attempt to identify nonfilers who filed in the prior year but failed to file a tax return for the current tax year.”

The Large Business and International Division (LB&I) will begin a new compliance campaign that will examine some areas of 2018 tax reform that specifically benefited some high-income earning taxpayers.

Some of these areas include:

  • Sec. 163(j)—Business interest deduction limitation
  • Sec. 172—Net operating loss (NOL) deduction refund claims
  • Sec. 199A—Qualified business income deduction
  • Sec. 965—Mandatory repatriation of previously untaxed foreign earnings
  • Foreign reporting and assets

Proactive Steps

While the IRS prefers to keeps its examination methodology for selecting returns private, they’ve signaled an increase is coming. It could be a good time to make sure your paperwork is in order.

If you think you might be selected for an examination, some actions you can take to prepare include:

  • Reviewing previously filed tax returns
  • Identifying any major events or transactions that occurred in previous years
  • Talking with your accountant about how 2018 tax reform affected you

Additionally, a strategic planning meeting with your accountant can serve as a mock IRS examination with emphasis on:

  • Analyzing record-keeping practices
  • Examining existing tax positions
  • Reviewing standard IRS document requests
  • Assessing risk areas
  • Preparing for interviews

We’re Here to Help

If you received correspondence from the IRS or have questions regarding strategic planning in anticipation of an examination, please contact your Moss Adams professional.