The Internal Revenue Service (IRS) has turned the old audit paradigm on its head by introducing a new enterprise, or holistic approach that allows it to more effectively target its audits. This new initiative, announced by two IRS commissioners at a tax forum held on July 10, 2020, identified over 1,000 private foundation returns associated with high wealth individuals.

Information technology will allow a more efficient audit of high wealth individuals and the entities they hold or control, such as partnerships and trusts, retirement plans, private foundations, and employee stock ownership plans (ESOPs). This new initiative, aimed at private foundations, began after the COVID-related “People First Initiative” ended on July 15, 2020, and will continue through the fall.

The IRS used data analytics to identify its private foundation targets. They are currently training 400 agents in the Tax Exempt & Government Entities Division to audit private foundations and work alongside the high wealth individual exam teams. Audit letters should be going out soon.

It was only a matter of time before the IRS developed better tools and more efficient methods for targeting its audits towards high-risk areas. By using the information provided by its Data Analytics Strategy Board, the IRS can more efficiently identify high wealth individuals and their associated entities. A word of warning: the commissioners announced that ESOPs will be their next target!

The fact that these particular private foundations are being targeted does not mean the IRS found any errors on the filed returns. So, while taxpayers should promptly respond to these audit letters, they should not be unduly worried.

Should you have any questions about this new initiative, please contact your local CRI professional.