Skip to comments.Is the New IRS Wealth Squad Coming for You?
Posted on 10/29/2009 9:16:55 AM PDT by kcvl
Is the New IRS Wealth Squad Coming for You?
Smart Money, Oct. 27, 2009
Being wealthy has its downsides, chief among them the higher risk of an IRS audit.
Now, amid the continuing debate over whether the government is doing enough to combat financial fraud, comes news that gives the uber-wealthy or maybe even the merely wealthy yet another reason to fear Uncle Sams attention.
In a speech before the American Institute of Certified Public Accountants, or AICPA, IRS Commissioner Douglas Shulman announced the recent formation of a new unit, dubbed Global High Wealth Industry Group, which will focus on the nations wealthiest individuals and their entities.
The groups work will go way beyond screening tax returns and your garden-variety audit. We will take a unified look at the entire web of business entities controlled by a high-wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system, Shulman said in his speech.
That, says Lisa Feathernhill, a CPA and director of estate and financial planning at Wells Fargos Family Wealth Group, is very broad and very deep. Theyre trying to understand how very wealthy people have their finances structured, she says. When I read that, it gave me pause.
The IRS has already begun hiring agents and specialists for this wealth squad, including flow-through specialists and international examiners, and plans to add more staff, including economists, appraisal experts and technical advisors in the near future.
How will these specialists decide who to put under the microscope? Several broad clues can be gleaned from Shulmans speech. SmartMoney.com spoke with wealth managers and CPAs who work with high-net-worth individuals for more specifics. Here are some criteria that are likely to be considered a red flag:
1. Income or assets over $10 million Shulman pointed out that at least initially, [the IRS] will be looking at individuals with tens of millions of dollars of assets or income. Granted, the number of people who earn tens of millions a year may appear infinitely small: In 2007, the IRS received 18,394 tax returns reporting adjusted gross income (AGI) of $10 million or more, less than 0.05% of total tax returns received. It is often limited to celebrities and top-level executives. But certain events, like receiving a particularly juicy bonus or retirement package, could well throw you into that group. Retiring executives who might have distributions from several plans would have very large income tax returns for at least the first year or two after retirement, says Featherngill.
Throwing asset size into the mix expands the target group considerably. It could be anybody: real estate owners, closely-held business owners, [those with significant] investment assets, Featherngill says.
2. Complex financial arrangements Heres what Shulman had to say of the types of assets that may attract attention: They may include trusts, real estate investments, royalty and licensing agreements, revenue-based or equity-sharing arrangements, private foundations, privately-held companies, and partnerships and other flow-through entities that require looking at the entire, and often huge, spectrum of transactions and entities. A single high-wealth individual may have actual or beneficial ownership of numerous related entities, sometimes alone and sometimes along with other family members or business associates.
Sounds like an all-inclusive resort, right? Harry Abrahamsen, principal of Abrahamsen Financial Group, a wealth management group in Holmdell, N.J., says individuals who have investments in hedge funds that are set up, or raise money, offshore are particularly at risk. This is probably a direct offshoot of the UBS [tax shelter probe] and people setting up offshore accounts, he says. 3. Offshore income or tax residency
Other tax considerations include international sourcing of income and tax residency, and offshore structures and bank accounts, Shulman said. Youre more at risk if you have substantial wealth; dual citizenship and assets in another country; are a legal resident alien (i.e., you do not have U.S. citizenship, but are working or living in the U.S. temporarily); or simply have assets outside of the U.S., Abrahamsen says.
4. Movie and rock stars, athletes, expats What do all these professions have in common? They are much more likely to hear from the new IRS unit, says Abrahamsen. The size of their paychecks aside, entertainers and athletes tend to bring in a lot of their income from performing overseas. So do expatriates including U.S. citizens on temporary assignments in foreign countries.
The IRS wont likely overlook successful business owners, either: The holistic approach of this new type of audit could mean that once youre on the IRSs radar, your companys balance sheet may wind up audited along with your own tax returns, says Featherngill.
All they have to do is look at who hasn't made out a nice check to the DNC in recent years.
The IRS wont likely overlook successful business owners,
I’m relieved. After Obama’s HOPE and CHANGE dog and pony show, I don’t have to worry about the “Wealth Squads” coming after me any longer.
I HOPED that this year would be even better than last year but a CHANGE in my business has me fighting to survive this Marxist.
But tax cheats like Timothy Geithner & Charlie Rangel get a pass!
You need to run for Congress or get appointed to something in the Obama administration. They don’t have to pay their taxes!
I have no problem with this. I DO NOT cheat on my taxes (although I take every legal deduction I am entitled to). If everyone else (especially the very rich), did not cheat then the rest of us could pay less. Do I wish I could pay less taxes? Of course. But I do feel priviledged to live in the best country in the world? Yes, I do.
So, now, what tax returns have information about wealth and assets? It is those evil corporations, subS, Partnerships which have a balance sheet to report.
Time to move things into a sole proprietorship. At least you might be under the radar for awhile.
And, of course, you have proof that 'everyone else' cheats on their taxes "(especially the very rich)"?
They take every LEGAL deduction they are entitled to also but the IRS may not interrupt it as 'legal' because they have IRS agents who are CLUELESS!
It’s been devastating for many—I really feel for you. Maybe if we can get some solid conservatives elected we can beat back the FedGov a little bit. It’s totally out of control.
I did not say everyone else cheats, I said if everyone else did NOT cheat.
Add to that you have your own personal private health insurance and you are set up for life. Just thumb your nose at the masses if they harass you. Or better yet, tattle on them to CNN, ABC, CBS, MSNBC, NPR...........
The cheaters are the people who are writing the laws they expect the rest of us to live by (NOT THEM!).
The bunch in Washington hates all the people who worked hard during their lives and saved some of their money. The bastards have their eyes on the money and want to grab it and give it to the people who vote democrat.
The normal joe can barely afford to drive to the library to get the forms to file.
The normal joe can't afford to go to H&R Block anymore to get them to file for him.
The normal joe will file on his own and make mistakes.
Who is the IRS going to audit?
Anyone they damn well please including political enemies. Ask Bill O'Reilly, Rush Limbaugh & Sean Hannity among others.
The IRS auditors and most everyone who works there are IDIOTS. It's the original breeding ground for affirmative action who can't be fired for ANY DAMN reason. They make their own hours, their own laws, their own rules, their own 'truth' and the list goes on. Common sense doesn't exist in their vocabulary and neither does decency or politeness.
I know about political.
My only audit came after I FReeped her heinous, Hitlery back in 2003 and gave my name in a television interview.
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not
bound to choose that pattern which best pays the treasury. There is not even a patriotic
duty to increase one’s taxes. Over and over again the Courts have said that there is
nothing sinister in
so arranging affairs as to keep taxes as low as possible. Everyone does it,
rich and poor alike and all do right, for nobody owes any public duty to pay
more than the law demands.”
(US Appeals Court Justice the Honourable Learned Hand)
You ‘should’ have a problem and you likely ‘would’ have a problem with this, if you thought further, especially if you knew tax history and how these things in history get played out.
What has happened in the past and always happens because government is predictable in these things is outlined as follows:
1. The government chooses a new tax target. First it always chooses the ‘rich’ however ‘rich’ is defined at the time and however it becomes defined under changing policy.
2. After choosing a target of ‘rich’, the government asks newly assembled employees and contractors to submit plans and goals for how much revenue can be recovered hypothetically under the new target program. The employees/contractors will submit estimates and goals that are far too high and overreaching. If the submitted estimates/goals are too low for policy makers, then the plans will be sent back for further review, with instructions for changes, inclusions etc. until the numbers are in line with what policy makers want to hear. In other words, total recovery estimates will be fudged based on how large a task force is wanted by policy makers.
3. Once recovery estimates are acceptable to policy makers, a compliance task force of government and contractors will be funded based on a percentage of the recovery estimate.
3a.This force is assembled and paid for based on estimates that are unrealistically high for recovery.
3b. As a side note, the government has in at least the last ten years posited the existence of a $300 billion ‘tax gap’. Study after study has estimated that it would cost almost as much to close the gap through enforcement, because it would require enormous manpower to monitor and audit millions and millions of small businesses, and to fund litigation in courts. And that’s not to mention the intrusiveness that would occur or the validity of the assumptions that the accuracy of the tax gap is based on.
3c. So we need to keep in mind that the government is going to spend an enormous amount of money in an attempt to recover an unrealistically high amount of tax revenue. This is not a speculation, it is based on similar tax compliance campaigns in the past. That is why every new tax compliance program has a ‘settlement’ provision in order to try and limit the cost of recovery on a case by case basis. But the government is hugely inefficient, so whatever it may profit in a negotiated settlement is quickly swallowed up by other cases that turn up nothing, or as often occurs a refund owed taxpayers.
4. A new campaign to assemble a tax task force to go after the ‘rich’ is nothing new. Previous efforts result in more tax expats and more capital flow offshore with different evolving structures to shield owners from confiscation of their capital. Each tax task force in the past has never been successful in meeting its original goals. In fact, the efforts have complicated matters and made them worse.
5. (IMPORTANT) Invariably once a tax task force has reached a point of diminishing returns (normally in 1 - 3 years). the task force is not dissolved but is redirected for other policy enforcement programs. This means the army of tax enforcers is turned away from its focus on the ‘rich’ and is turned toward new targets defined by policy makers. You should be able to infer who the new targets are. If the new targets are not ‘rich’, then what are they? They are always a new definition of ‘rich’ and they are likely to be your neighbor.
In sum, if you think the present tax system is sustainable as your comments indicate, then you should explain to us how you think the government will not:
1) raise our taxes in the future to close a $1.4 Trillion deficit or,
2) devalue our dollar so that our purchasing power will not allow us to buy a bag of groceries at 50% of today’s prices or,
3) severely cut or tax our retirement benefits or,
4) limit our health coverage to control costs.
If you think that tax policy needs reform, then please tell us how you think it needs to be reformed.
By the way, there exists a new tax code proposal that is the most researched tax system proposal ever made and is endorsed by prize winning economists, actuaries and academics. It will result in a voluntary return of the $11 trillion that has fled offshore and will revive American export competitiveness. It will also be simple and much easier to enforce.
The problem with this new tax code is that it will take away the present power of policy makers to choose targets, to choose winners and losers, to punish their ideological adversaries and reward their supporters. In short, the new tax code will put an end to the tax gaming industry that resides in the many tax lobbying firms with revolving doors between themselves and Congress. Because to these people, the present tax code provides a good smoke screen to their corrupt practices, and these practices are to them a growth industry. Because this new tax code threatens the tax gamers, the gamers have ridiculed the new tax code and attempted to obstruct it from gaining support. The gamers have had limited success with stopping the new tax code in the halls of Congress but they are failing with the grass roots.