More On Tax Planningfrom The Advisor's Professional Library
- IRAs: In General Individual Retirement Accounts are highly popular tools for contributing funds that grow on a tax deferred basis. Depending on the type of IRA, the accumulation can be tax free.
- Annuities: Variable Annuities Annuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.
The IRS launched the Large Business and International Division’s high-wealth industry group (“HNW Initiative”) in October 2009 with the purpose of examining high-net worth individuals for income tax compliance. But the Service may be “using more rhetoric than resources,” according to Syracuse University’s Transactional Records Access Clearinghouse (TRAC). TRAC’s April 14 report, based on information compiled from public records, accuses the IRS of having “very skimpy” audit goals for the HNW initiative.
The putative goal of the HNW initiative is to “take a unified look at the entire web of business entities controlled by a high wealth individual, which will enable [the IRS] to better assess the risk such arrangements pose to tax compliance and the integrity of our tax system.”
But TRAC’s report indicates that the HNW initiative plans on auditing only 122 returns for the 2011 fiscal year and claims that it will fail to meet even this modest target. According to the report, the IRS will meet only 19% of its audit objectives for the first six months of 2011.
The IRS vehemently disagrees with TRAC’s findings, saying that development of the initiative is continually progressing. In fact, the IRS reports that it is investigating 250 business entities— more than twice the amount quoted by TRAC.
Despite these claims, some commentators believe that the initiative isn’t running as smoothly as anticipated because outside tax advisors typically don’t have immediate access to the financial data requested, resulting in delays. One individual noted that the affluent taxpayers targeted by the HNW initiative are receiving the services of the top financial advisors in the country, and are likely already compliant.
The discrepancy between the reported numbers by TRAC and the IRS will be verifiable once the fiscal year 2011 ends. Until then, advisors are likely to gain a better understanding of whether or not the initiative’s requests for essentially all documents relating to high net worth clients’ incomes actually pose a threat. Once this information is available, advisors can determine whether the HNW initiative allows the IRS to pick-and-choose who gets audited, or if the new unit merely implements additional procedures as safeguards.
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See also The Law Professor's blog at AdvisorFYI.