IRS Audit Risk for Fund Managers

The earths axis seemed to have tilted way off course last year. The global capital and credit markets crashed. Venerated banking institutions moved dangerously close to insolvency forcing mergers with better capitalized banks. The bulge bracket investment banking institutions disappeared. Some were acquired by traditional banks, others converted to a bank holding company structure; while others declared bankruptcy. In response, the Federal Reserve, Treasury Department and SEC initiated unprecedented concerted interventionist actions. The passage of EESA legislation and the implementation of the $750bn TARP program are the first in many expected moves by the government to maintain the solvency of the banking system as a national economic security issue. In addition to these initiatives the government has also passed a massive $750bn economic stimulus bill to kick start the economy. All told over $1.5 trillion dollars has recently been appropriated by the federal government to address the economic crisis. This massive capital infusion has ratcheted up the federal budget deficit. It will be incumbent on the Treasury Department and the IRS to make a concerted effort to uncover new sources of revenue to finance these massive spending programs.

Hedge funds, private equity firms, CTA's and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS. Times have changed and so has the posture and practice of the IRS. The agency is transitioning its organizational posture by moving away from a benign customer service resource and assuming the form of an activist body that is intent on assuring compliance and enforcement of US tax laws. In particular it is building up its expertise and resource to more effectively address the audit challenges the complexity and sophistication hedge funds present.

The IRS has developed its industry issue competencies. It is creating a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital. Industry issue coordinators have also been appointed to lend administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. Clearly the IRS is building up its portfolio of skills, industry expertise and organizational capacity to address the sophisticated agility of the alternative investment management industries tax professionals.

To better focus the resources of the agency the IRS has grouped Industry Focus Issues (IFI) within three tiers. IFI are industry issues the IRS considers to be of strategic interest to the agency and are worthy of considerable attention by field audit teams. Corporations with exposures in these focus areas need to exercise more diligence in its preparation and response to potential audit threats. Each IFI tier comprise risk factors ranked by its strategic interest to the IRS . This helps IRS auditors to understand a funds risk profile when opening an examination of an investment company and other sophisticated corporate structures. The IRS has created the three IFI tiers to rank significant examination issues according to the strategic agency interest within the investment management market vertical. In all the IRS has identified 36 risk factors across the three IFI tiers.

Clearly the IRS is investing significant organizational and human capital to address an industry that will no longer fly beneath the agencies radar. The IRS is making a significant investment in its industry response capability and will be called upon to generate a considerable return on the investment in the hopes that the discovery of lucrative tax revenue streams will help to pay down the massive spending deficits of the federal government.

This development has clearly raised the tax compliance and regulatory risk factors for the investment management industry. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with well a well considered risk management program.

In response to this industry threat, Sum2 developed the IRS Audit Risk Program (IARP) as a tool for investment and corporate treasury managers to determine exposures to each IFI risk factor. The IARP helps managers determine aggregate risk by scoring audit threats for each risk factor.

The IARP helps managers to prioritize the threat of each of the 36 risk factors. Tax managers can outline mitigation actions, assign mitigation tasks and monitor task completion. The IARP is a valuable tool to help managers frame strategies to respond to tax audits.

The IARP allows managers to determine the extent of potential resolution expense associated with each risk factor. The IARP calculates aggregated mitigation and resolution expenses for all tiers.

The IARP assists managers to more effectively communicate with outside tax attorneys, CPA's, custodians, administrators, prime brokers and fund investors.

Sum2 is conducting a survey on IFI awareness and its impact on audit risk for fund managers. To date the results have indicated that industry awareness of IFI and the audit risk factors associated with IFI is low.

The IARP is a necessity for hedge funds, private equity firms, CTAs, RIAs, global multinationals and corporations utilizing offshore structures. The IARP is a critical resource for CFOs, CCOs, CROs and internal corporate counsel. Corporate treasury executives that engage in innovative transactions, recognize unusual revenue sources and employ sophisticated tax strategies will benefit from the use of this product. CPA firms and corporate tax attorneys with a focus on financial services industry will find the IARP an indispensable risk discovery and client engagement tool.

The IARP is a vertical application of Sum2's Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and discover opportunities to assure profitability and growth. The IARP product is available in an industry standard MS Excel© application and is digitally delivered.

The IARP is a vertical application of Sum2's Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.

A single seat license for the IARP is $95.00.

It can be purchase on Amazon by clicking the below icon.




NB: The IARP product does not offer advice nor does it recommend compliance guidelines. Its purpose is to help fund managers assess risk levels and provide a tool to align corporate resources to mitigate risk factors. It is highly recommend that you consult with tax, legal and compliance professionals to address the risk exposures that the IARP uncovers.