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GPSolo Podcast

High-Net Worth: The New Middle Class?

Lynn A Howell, Allison D. H. Soares, and Lauren Suarez

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The IRS generally classifies high-net worth individuals based on their significant income and assets, although there is no strict financial threshold. However, being classified as "high net worth" no longer guarantees significant financial security, as rising living costs and inflation have diminished the purchasing power. What once was considered a mark of substantial wealth now often equates to maintaining an middle-class lifestyle in some parts of the country.

The audit process for high-net worth individuals begins with their selection for examination, which can stem from various methods such as data analytics, referrals, or information obtained from other audits. Once selected, the audit involves a comprehensive review of the financial records, income, expenses, assets, and deductions. This can be conducted through correspondence, in-person interviews, or both. The IRS’s objective is to identify any discrepancies and underreporting, which are common in areas such as business income, investment income, and offshore accounts.

Triggers for these audits often include inconsistencies between reported income and the taxpayer’s lifestyle, large charitable deductions, offshore accounts, and complex investment structures. These individuals can be subject to more detailed and complex audits compared to the average taxpayer, primarily due to the intricate nature of their financial situations and potential for non-compliance.

To ensure compliance and collection, the IRS employs various tactics, including levies on bank accounts, wage garnishments, property seizures, and installment agreements. Additionally, the IRS may use specialized units and forensic accountants to pursue these cases.