Audits, as scary as they may sound, are not very common. The IRS handled some 192 million tax returns filed in 2014. For fiscal year 2015, the agency "examined" (a word the folks there have for audited) fewer than 1 percent of them — 0.7 percent, to get IRS precise. (Most of the audits don't involve a black-suited dude with no humor poring over receipts on your living room table, by the way. Most are done via email or regular mail.)
The actual number of returns that the IRS audits has been slipping steadily since 2010, too, because (the IRS says) of funding cuts and sequestering, the automatic cutbacks mandated by Congress in 2013.
The IRS, it seems, can't afford to go looking for all its money.
Still, the IRS knows where the real cash is, and that's with the super-rich. Once an individual's adjusted gross income starts to climb over $200,000, the number of audits begins to soar, to the point where, if you make more than $10 million a year, you have a better than 1 in 3 chance of being audited.
Enter the Wealth Squad. The team of accountants, tax lawyers, finance experts, economists and others who delve into the lives of the super-rich to get the country's due. Most of their work is done under the radar. But, according to Forbes, a certain president-elect who didn't release his taxes to the public because he was being audited is a Wealth Squad target.
The squad's first step: filing forms, of course. (This is, after all, the government.) Form 4564, better known as an Information Document Request, goes out, and the Wealth Squad's target is expected to comply.
If not ... well, that's where things can get complicated. The mega-wealthy didn't get that mega-way by handing over their money to the government.
"There are certain things that wealthy people do that are tax avoidance, or evasion, and one of them used to be offshore accounts," Langbein says. "But they really have cracked down on that."
The super-wealthy have long stashed their cash in foreign banks, away from the prying fingers of Uncle Sam and his tax-grabbers. In recent years, the IRS instituted the Offshore Voluntary Disclosure Program, which allows the guilt-laden to 'fess up (and, of course, pay up) to avoid the alternative: getting caught, having their assets seized and, possibly, spending time in jail.
The rich continue to hide their money offshore, though, and in many other ways. Those fancy corporate jets are a headache for the Wealth Squad, Langbein says, rife with possibilities for questionable deductions and depreciation. Shell corporations are established and sold to lessen (or avoid) taxes. It can get complicated.
From the Journal of Tax Practice & Procedure:
A typical Wealth Squad examination consists of a key case, generally the taxpayer's Form 1040, and related income tax returns for which the taxpayer has a controlling interest in the entity and for which a significant compliance risk may exist. These entities may include partnerships, trusts, S corporations, C corporations, private foundations, etc. The examination often includes other individual income tax returns affected by flow-through adjustments made on the tax returns for partnerships and S corporations controlled by the key taxpayer.
When companies or individuals are considered multinational, the laws of other nations have to be considered, too. It would seem, sometimes, to take a superhero, or a team of them, to untangle everything.
"The information is so hard to get," Langbein says.
Yet the IRS and the Wealth Squad soldier on.
