CRA audit of high-net-worth individuals and new US voluntary disclosure program

In 2008, the Organisation for Economic Cooperation and Development (“OECD”) released a discussion paper regarding their project on high-net-worth individuals.  The discussion paper was intended for public comment. Tax advisors who read the discussion paper and who work with private clients were certainly concerned about some of the comments made.  In September 2009, the OECD released a publication entitled “Engaging with High-Net-Worth Individuals on Tax Compliance”.  The publication explored “…the significant challenges to tax administration [when dealing with high-net-worth individuals] due to the complexity of their affairs, their revenue contribution, the opportunity for aggressive tax planning and the impact of their compliance behavior on the integrity of the tax system”.  Given the OECD’s activity in recent years regarding high-net-worth individuals, tax advisors (like our firm) were not surprised to see certain countries start to engage more with that group.

For example, in October, 2009, the US tax administrators – the IRS – announced the formation of a high-net-worth audit group named the Global High Wealth Industry group which is housed in the IRS large and mid-sized business operating division.  From many accounts, the audits by the Global High Wealth Industry group have been particularly harsh.

In Canada, the CRA has been announcing at various tax conferences throughout the last year that their audit practices would change to focus on high-net-worth individuals.  A recent article in last weekend’s National Post confirmed that such audits have commenced.   The article refers to a questionnaire that the CRA has provided to high-net-worth individuals to complete.  Our firm has a copy of the 18 page questionnaire and has reviewed it.  Many of the questions are simply requesting facts but one could certainly view the questions to be rather invasive.

High-net-worth families and individuals are certainly going to be targeted into the future by tax administrators around the world.  For Canadians, the message is to get ready and be prepared.  Our firm can certainly assist in such preparation.

Lastly, the IRS announced yesterday a new special voluntary disclosure initiative for US taxpayers who have unreported income from offshore assets.  This is the second attempt by the US to encourage voluntary disclosures for unreported income from offshore assets (see our blogs of September 8, 2009 and August 25, 2009).  However, a quick read of the current second initiative seems to us to be particularly harsh.  The program will be available for US persons to voluntarily disclose their unreported income through August 31, 2011. Participants in the new program face a 25% penalty (which may be reduced in some circumstances to either 12.5% or 5%) of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 – 2010 time period.  Participants will also have to pay back taxes and interest for up to 8 years as well as accuracy related and/or delinquency penalties.  US persons affected by this proposal will have to ensure that they seek proper US legal advice.

No shortage of activity… stay tuned!