Show Your Work

The renewed focus of the IRS’s “Wealth Squad” means family offices need a proactive strategy to ensure a “no action” outcome from a tax review. Digitization will be key to achieving this.

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Last week, the IRS received $80bn in new funding, with $43 earmarked for enforcement action to collect an estimated $600bn in tax revenue. At a time when 81% of family offices already feel like regulatory oversight amounts to government intrusion, families and professionals alike need to prepare for more.

Known as the “Wealth Squad,” this IRS unit was formed over a decade ago to coordinate detailed examinations of complex returns filed by high-net-worth individuals and their related entities. With more resources now available, family offices will certainly be in their crosshairs.

The same study suggests that 82% of family offices see “protection of wealth from taxation” as a primary business purpose. This isn’t lost on current IRS Commissioner Charles Rettig, a former wealth attorney, who stated in 2016 that “many of these arrangements are entirely above board. Others mask aggressive tax strategies.”

Despite a prevailing media narrative suggesting widespread wrongdoing, our experience is that family offices do the right thing regarding their tax affairs. The question now is how ready offices are to prove this to Rettig’s wealth squad. Even for families following the rules, proving compliance can take years and cost millions of dollars in defense fees.  

In this new era, collating evidence may be one of the biggest challenges. Once a wealth squad notice is served, families have 45 days to deliver an initial document request. In previous articles, Commissioner Rettig described this list as including “everything imaginable,” warning that even seasoned tax practitioners will be overwhelmed.

Families must identify, locate, and show proof of decisions and actions taken over a multi-year period. Conducting this kind of internal audit within a fragmented technology ecosystem will pit even the most compliant family against the clock as they race to find everything they need.

As the threat of Wealth Squad action starts to be realized, the mantra for family offices will become, “show your work as you work.” It will no longer be enough to be compliant; offices must show compliance. And this will require a new approach. It won’t be possible to show work using manual processes that plug together a patchwork of operations, systems, and technologies. Instead, offices need a digital-first approach that connects decisions, documents, and actions intuitively and in context.  

To achieve this objective, a Digital Family Office is needed as a governance framework for all current and historic family businesses. All activity can be normalized, captured, and presented as institutional knowledge. Every decision, document, process, and action is recorded digitally and immutably, creating a single source of truth that shows, without question, what work was completed, by whom, and when.

iPaladin’s Digital Family Office doesn’t just provide evidence of your activity; it also helps you identify blind-side risks and direct remedial action before they develop into something more serious. For example, the platform can identify record-keeping gaps with its Annual Review function, ensuring that all wealth operations remain “audit ready” as work evolves.

For our clients, the only acceptable outcome of a Wealth Squad review is a quick no-action letter. Our clients have immediate access to defensible knowledge, leaving 45 days open for strategy. How quickly could your office respond?

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If you want to learn how to increase your accessibility to defensible records, schedule a consultation with our team.

Credit - Jill Creager - President & CEO iPaladin

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