More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
It’s the little omissions that can trip you up—like not filing certain tax reports. The IRS gets annoyed about missing reports, and sometimes goes to considerable lengths to find delinquents.
Consider: The IRS has been in stealth mode for the past 18 months, searching for unreported gifts of real estate valued at more than the $13,000 per year filing threshold for individual gifts. Its activities blipped onto practioners’ radar in December when the Justice Department filed a petition in federal court on the agency’s behalf seeking permission to serve a so-called John Doe summons on the California Board of Equalization, a taxing body.
As described in several publications and analyzed in a number of law firm blogs and client alerts, the summons would require the board to turn over records of real property transfers by state taxpayers between 2005 and 2010. The California petition related to a “compliance initiative” launched by the IRS in early 2010 to investigate taxpayers who have failed to file Form 709 U.S. Gift (and Generation-Skipping Transfer) Tax Return.
The court turned down the IRS request on May 20.
The most interesting aspect of the California proceeding was an affidavit filed in support of the Justice Department’s petition by Josephine Bonaffini, a licensed Boston attorney and the federal/state coordinator for the IRS Estate and Gift Tax Program.
Bonaffini reported that she had been working with IRS teams across the country to examine taxpayers who have transferred real property to related family members for little or no consideration and who have failed to file Form 709. So far, the IRS has received information about such transfers from 15 states, she said.
According to a May 26 Wall Street Journal article, Bonaffini said that after digging through state land-transfer records for evidence of omissions, the IRS had reported that:
- It had examined more than 300 taxpayers in the previous two years for failure to report possible gifts;
- It was currently examining some 200 taxpayers;
- It was considering another 250 for review.
Bonaffini wrote in her affidavit that examinations showed 97 taxpayers had failed to report gifts on Form 709, and a dozen cases had resulted in taxes or penalties because a gift had put the donor over the then-applicable $1 million lifetime gift credit.
Among the states that had provided information to the IRS, failure to file a Form 709 ranged between 60% and 90%, she said.
Taxpayers are required to file gift tax returns for any transfer of property valued at more than $13,000. No tax is due and payable until cumulative gifts over and above the $13,000 annual exclusion exceed the current lifetime exemption of $5 million. A gift tax return is required even when no tax is due so the IRS can keep track of cumulative gift giving. Applicable taxable gift rates can go as high as 35%.
In a June 29 client briefing on the IRS’ compliance initiative, the law firm Fulbright & Jaworski LLP warned that taxpayers required to file a Form 709 who have failed to do so may be subject to penalties and criminal prosecution.