Tax News & Views Auditing the Wealthy Roundup

July 13, 2021

IRS switched strategies for pursuing wealthy, but came up short - Michael Cohn, Accounting Today:

The change in compliance strategy potentially resulted in nearly $2 billion in lost tax revenue, according to a report released Monday by the Treasury Inspector General for Tax Administration. The IRS’s Small Business/Self-Employed Division started a High Income High Wealth, or HIHW, strategy in 2010 to increase compliance of high-income individual taxpayers, defined as those with “total positive income” of over $200,000. As part of the strategy, the IRS focused on high-income taxpayers who underreported their income and high-income people who didn’t file returns. However, nearly three-quarters (73%) of the closed cases for fiscal years 2015 through 2017 involved taxpayers who earned less than $200,000. The IRS SB/SE Division discontinued the HIHW strategy at the end of fiscal year 2017, and moved the high-income, nonfiler, and underreporter cases to two separate strategies for nonfilers and other priority programs.

Yet, reports TIGTA, high-income case closures continued to decline after the change in strategy.

"Total positive income" means income not counting losses and expenses. This helps identify tax shelters or other questionable loss expenses.


IRS Needs Tighter Focus on Rich Tax Avoiders, IG Says - William Hoffman, Tax Notes ($):

Individual master file examinations of returns of taxpayers with income between $200,000 and $1 million constituted just 63 percent of planned closures in the SB/SE program in fiscal 2016 and 50 percent in 2017, TIGTA said.

On the other hand, SB/SE exams of returns of taxpayers with less than $200,000 in income exceeded IRS targets by 123 percent in 2016 and 113 percent in 2017, according to TIGTA.

“Examinations of high-income taxpayers within the [high-income/high-wealth] strategy produced more dollars per hour on average than any other strategy between [fiscal years] 2015 and 2017,” TIGTA said.


High-Wealth, High-Income Audits Often Intersect With Partnerships - Kelley R. Taylor, Tax Notes ($). Quoting Holly Paz, deputy commissioner, IR Large Business and International Division:

“With global high-wealth examinations, we start with that wealthy individual’s [Form] 1040, and we work our way out,” Paz explained. “We basically follow transactions that we think present some risk of noncompliance and then open related returns to allow us to look at those transactions.”

For example, Paz said it is common in a global high-wealth audit to open four or five different types of returns beyond the wealthy individual’s Form 1040. Those could be returns for a C corp, an S corp, or a partnership.


“We are talking about folks in the tens of millions of dollars,” Paz said. “These are folks whose wealth puts them on a plane where they are akin to a multinational corporation — where their planning opportunities are expansive, and they tend to have a web of various related or controlled entities.”


IRS resuming more tax enforcement & collection activities on July 15 - Kay Bell, Don't Mess With Taxes. "The IRS says it will resume sending automated levies on July 15 in coordination with other state and federal agencies."

Unfortunately, the IRS still has millions of unopened pieces of mail as a result of the pandemic. Many automated notices will go out threatening levies on issues that are addressed in letters buried in trailers sitting outside IRS service centers.

Related: Why is it Important to Read IRS Notices?


Banks, Credit Unions Brawl Over Proposed Acquisition Tax - Fred Stokeld, Tax Analysts ($):

The tax proposal and other measures are needed to curtail the credit union-bank acquisition trend and restore the original purpose of the tax exemption for credit unions, according to the Independent Community Bankers of America (ICBA).

The proposed tax — or “exit fee” — would be 10 percent of the gross value of an acquired bank’s assets or liabilities as displayed on its most recent balance sheet, whichever is greater, Rebeca Romero Rainey of the ICBA said in a July 7 letter to Treasury Secretary Janet Yellen seeking Treasury’s backing of the proposal.

When I was little, an uncle ran the local credit union out of his basement, and the cousins would play with the mechanical machines that typed transactions on paper cards. I had a three-digit account number. Now that credit union has assets over $250 million. The article reports there were 13 acquisitions of banks by credit unions in 2018 and 21 in 2019.


Massachusetts Lawmakers Approve Budget With SALT Cap Workaround - Carolina Vargas, Tax Notes ($). "Under a conference committee budget bill (H. 4002), passthrough entities could elect to file and pay taxes at the entity level; eligible passthroughs would pay a 5 percent excise tax on their Massachusetts income. Passthrough owners could then claim a refundable credit for their share of the taxes paid, allowing owners to avoid the $10,000 SALT deduction cap created by the Tax Cuts and Jobs Act."

The bill passed both chambers unanimously


Florida Bill Decouples From Various COVID-19 Provisions - Tax Notes. "Florida H.B. 7059, signed into law as Chapter 242, updates the state's reference to the Internal Revenue Code to January 1, 2021, for corporate income tax purposes but does not adopt specified provisions under the CARES Act (P.L. 116-136) and the Consolidated Appropriations Act, 2021 (P.L. 116-260) related to the temporary increase in the deduction of business interest expense, the depreciation of qualified improvement property, the temporary increase in expensing available to film and entertainment productions, and the temporary increase in the deduction for business meals."


Pillar 1 of Global Tax Deal on a Slower U.S. Track, Yellen Says - Stephanie Soong Johnston, Tax Notes ($):

U.S. Treasury Secretary Janet Yellen confirmed July 11 that Treasury is pushing to include measures to implement pillar 2, which calls for global minimum taxation, of the two-pillar plan in a forthcoming budget resolution and reconciliation package. She was speaking during a press conference the day after G-20 finance ministers and central bank governors concluded their July 9-10 meeting in Venice, Italy, under the Italian presidency, where ministers endorsed the plan.

However, countries must still negotiate further details of pillar 1, which calls for revising profit allocation and nexus rules, so “pillar 1 will be on a slightly slower track,” Yellen said, adding Treasury will work with Congress to push it through. “Maybe it will be ready in the spring of 2022, and we will try to determine at that point what's necessary for implementation,” Yellen said.

Also: "Yellen may be optimistic, but getting congressional approval will be difficult, according to Douglas S. Stransky of Sullivan & Worcester LLP. 'Congress cannot agree on anything until we get more details of what exactly companies will have to pay to which countries and what earnings, deductions, and exemptions will be included in the calculation of the amounts subject to tax,' he said."


EU delaying work on digital tax proposal amid global talks - Naomi Jagoda, The Hill. "The European Union (EU) is delaying its work on a proposal for a digital tax, as it and other major economies around the world seek to reach a final agreement on a global tax overhaul by October."

Brewing battle over tax hikes to test Democratic unity - Alexander Bolton, The Hill. "Policy experts across the ideological spectrum predict the battle over paying for Biden’s infrastructure priorities in the reconciliation bill will be one of the toughest of the 117th Congress."


Make your building an Energy Star - Kristin Gustafson, Eide Bailly. "Energy Star reviews often tie in with Section 179D studies, which allow current expensing of certain energy efficient building components that otherwise get capitalized to the building."

IRS Explains Why 1099Rs Don't Specially Report Qualified Charitable Distributions - Ed Zollars, Current Federal Tax Developments. "In many cases, the trustee might not know if the recipient charitable organization is an eligible organization under Section 408(d)(8) of the Code."

Moving Avoids California Tax? Not So Fast - Robert Wood, Forbes. "California looks to objective factors to determine residency. Your time in California versus time outside counts. California uses a comparative analysis to see if you have closer connections to another state. Many people who leave have unrealistic expectations and have a hard time distancing themselves from California. And be careful, because in California tax disputes, procedure counts. In some cases, California can even assess taxes no matter where you live."


Want To Know Why A Wealth Tax Won’t Work? Remember The Time Michael Jackson’s Estate Landed in Tax Court - Howard Gleckman, TaxVox:

A wealth tax, such as the ones proposed by senators Bernie Sanders (I-VT) and Elizabeth Warren (D-MA), could require taxpayers to value their assets annually. It is hard enough to do this once, at death. But doing it every single year would be an administrative nightmare that would generate endless disputes similar to the one over the Jackson estate. The IRS would present its appraisal and wealthy taxpayers would hire the best advisors money can buy to lower it.

The IRS might wanna be startin somethin but the rich would find plenty of reasons to tell the agency leave me alone.  


California Parent Pleads Guilty in College Admissions Case - Department of Justice. An associate professor of dentistry at USC became the 31st parent to plead guilty in the "Varsity Blues" college admissions scandal. From the release, with parent's name removed:

Dad agreed with William “Rick” Singer to pay $100,000 to facilitate the admission of Dad’s daughter to USC. Dad made installment payments toward that total to Singer’s purported charitable foundation, the Key Worldwide Foundation, and deducted the payments from his taxes as a purported gift to charity, despite knowing that they were not legitimate charitable contributions, but were made in exchange for facilitating his daughter’s admission to USC.

There's always a tax angle.


Moo. Today is Cow Appreciation Day, so do something nice for your favorite bovine. Maybe eat mor chikin.

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