IRS Commissioner Douglas Shulman told a gathering of CPAs that he had heard their concerns about the IRS requiring extra testing of CPAs who prepare taxes, and announced that the IRS would be expanding its probe of overseas income while targeting new enforcement efforts at high-wealth individuals.
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Addressing the American Institute of CPAs National Conference on Federal Tax Preparation, Shulman thanked the AICPA for its input on the proposed tax preparer regulations. We have received comments from you and others that those enrolled under Circular 230 are already held to a high standard of conduct, and should not be subject to any new test requirements, if we were to require testing of return preparers, he said. Let me just say that I have heard your concerns, and have some sympathy for them.
However, Shulman noted that there has been a sea change in tax administration in recent years as nearly nine out of 10 taxpayers today use either a tax preparer or third-party software to complete their federal tax returns.
He noted that the IRSs review of tax preparer regulations included listening to the concerns of the AICPA and other groups at various public forums. I believe there was widespread agreement, or consensus on several points," he said. "First, the status quo is not optimal. Unethical and unqualified return preparers can inflict enormous harm on taxpayers and the integrity of the tax system. Second, we need to find a way to ensure that return preparers demonstrate their competency. We received lot of thoughtful suggestions on how this could be done, including a lot of people saying there should be a testing requirement for preparers, and we are sorting through the ideas to identify those that hold the most promise. Third, return preparers must maintain their competency through ongoing education programs, along the lines of CPE courses that many of you in this room are quite familiar with. And finally, we have also learned that some of the possible outcomes of the effort could represent a big shift in the tax return preparer community. This will be a significant change and effort for us, and depending upon where we come out, we might need to phase in some of the pieces over a number of years.
Shulman went on to discuss the IRSs efforts at cracking down on international tax evasion. The agency will expand its efforts beyond traditional global hot spots. Our future offshore efforts will also be focused on multiple points around the globe, including funds flowing out from Europe to Asia, Central America and the Caribbean, said Shulman. To this end, the IRS is opening international Criminal Investigation offices in several new locations around the world in Beijing, Panama City and Sydney, in addition to existing offices, such as Hong Kong and Barbados. The new locations will put the IRS closer to key locations around the globe for international tax administration purposes.
Shulman said the IRS would also set up a special unit to take a closer look at the sophisticated arrangements that wealthy individuals set up to reduce their tax debts. He indicated that people with assets of $30 million or more might receive extra scrutiny.
Shulman noted that many high-wealth individuals employ sophisticated financial, business and investment arrangements with complicated legal structures and tax consequences.
Many of these arrangements are entirely above-board, he said. Others mask aggressive tax strategies."
He noted that such arrangements may include trusts, real estate investments, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately held companies, partnerships and other "flow-through entities that require looking at the entire, and often huge, spectrum of transactions and entities. A single high-wealth individual may have actual or beneficial ownership of numerous related entities, sometimes alone and sometimes along with other family members or business associates. And there are other tax considerations regarding high-wealth individuals, including international sourcing of income and tax residency, and offshore structures and bank accounts, to name just a few.
The IRS may follow the lead of other countries, which have defined high-wealth individuals based on their assets; income amounts under their control, including through privately held corporations, partnerships, trusts, and family members; and the complexity of the individuals financial affairs and their relationships with a large number of related entities. The Organization for Economic Cooperation and Development has been working to define high-wealth individuals.
Its work thus far suggests that something in the neighborhood of $30 million of assets may be a reasonable dividing line for many countries, said Shulman, adding, At least initially, we will be looking at individuals with tens of millions of dollars of assets or income.
Going forward, he said, the agency would 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.
The IRS has begun hiring some agents and specialists, such as flow-through specialists and international examiners, who will begin conducting examinations of high-wealth individuals and their related enterprises, Shulman noted. Among the first steps will be a small number of examinations of high-wealth individuals that will use this integrated approach. What we learn from these initial enterprise examinations will help us define the scope of our future work and build compliance tools going forward, he said.