Published On: October 16th, 2024|By |Categories: RSM, Article, Tax|3.8 min read|

ARTICLE | October 16, 2024

Understand the red flags that could attract an IRS audit and how to safeguard your wealth.

The IRS is ramping up its scrutiny of high net worth individuals, particularly using advanced artificial intelligence (AI) to identify potential audit triggers. Managing diverse income streams, complex investment structures and international holdings can increase the likelihood of attracting IRS attention. Understanding common triggers that could lead to an audit and knowing how to address them is crucial for safeguarding your financial interests.

Trigger #1: Complex income streams

High net worth individuals often have diverse and complex income sources, such as investment portfolios, real estate holdings, private equity and foreign income. The IRS closely monitors any discrepancies or unusual patterns in income reporting that could indicate noncompliance.

Stay compliant: Regularly review and reconcile income from all sources with the help of a tax professional to ensure accurate and consistent reporting.

Trigger #2: Aggressive tax strategies

Aggressive tax planning strategies—significantly using deductions, credits and offshore accounts—can raise red flags. The IRS may scrutinize transactions that appear to lack economic substance or are designed purely for tax avoidance.

Stay compliant: Work with a knowledgeable tax advisor to ensure that all tax strategies are fully compliant with current regulations and supported by proper documentation.

Trigger #3: Large charitable contributions

Large deductions for charitable contributions, especially those involving noncash assets like art or real estate, can attract IRS attention. Proper documentation and appraisals are essential to substantiate these contributions.

Stay compliant: Maintain thorough records of all charitable contributions—including receipts, appraisals and the purpose of the donation—to support your deductions.

Trigger #4: Foreign bank accounts and investments

The IRS focuses heavily on foreign assets under FATCA (Foreign Account Tax Compliance Act) and FBAR (Report of Foreign Bank and Financial Accounts) requirements. Failure to report foreign income or assets can lead to significant penalties and increased audit risk.

Stay compliant: Ensure full compliance with all foreign asset reporting requirements, including filing the necessary FATCA and FBAR forms, with the help of an experienced tax advisor.

Trigger #5: Lifestyle and expenditures

The IRS may compare reported income with lifestyle and spending habits. A significant mismatch between reported income and lavish expenditures (e.g., luxury homes, yachts, private jets) could trigger an audit.

Stay compliant: Ensure that your reported income aligns with your lifestyle and expenditures, and keep detailed records to explain any large purchases or expenses.

Conclusion

Understanding these common audit triggers can help high net worth individuals stay compliant and avoid unnecessary IRS scrutiny. Proactively managing and documenting financial activities can safeguard your wealth and maintain peace of mind.

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Source: RSM US LLP.
Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/services/business-tax/key-irs-audit-triggers-how-wealthy-individuals-minimize-risk.html

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The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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