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The IRS has a unit set aside to examine wealthy taxpayers and their complex financial dealings. The unit has begun looking closely at some hedge fund managers and others that it believes may be trying to evade taxes.

The audits by the Global High Wealth Industry Group are said to be particularly rough. People being audited have been asked to turn over difficult-to-get documents on a very short timeline.

The Global High Wealth Industry Group was established just last year. Orange County tax attorneys note that it is headed by Donna Hansberry, a longtime litigator for the IRS who was formerly a senior legal adviser on the IRS commissioner’s staff.

The idea behind the new unit is that individual audits will be in the hands of agents who have worked on coordinated corporate audits. The agents may be better at discovering tax evasion, because of their experience and sophistication.

The audit teams are said to be “A-list examiners” drawn from around the country who are knowledgeable and experienced with various financial products and industries. For the time being, the teams are only handling a few audits at a time, because the audits themselves are so intensive.

The unit is looking at “individuals who have a complex set of situations, and looking at the complete financial set up,” according to IRS spokeswoman Michelle Eldridge.

A major problem the unit is encountering, and that the audited individuals are encountering, is that individuals don’t necessarily have a tax department or financial officer to respond to IRS requests, the way a corporation would.

Wealthy people often make sophisticated business and investment arrangements with complicated legal structures and tax consequences. These can involve other family members or business associates, and can be difficult to map. Some are simply mechanisms to evade taxes, while others legitimately protect assets, promote charitable causes or defer income.

The IRS has been requesting obvious items, such as copies of original and amended tax returns, sources of income, properties owned directly or leased, and liabilities. The difficulties have come from requests for things like the names of each current and former officer, trustee and manager of financial entities with which the taxpayer is involved.

Source: Wall Street Journal “‘Audits From Hell’ Target Rich” 11/13/2010