IRS Targets Super Wealthy

Introduction

Heeding the howls of Congress and the press, IRS will audit the super-wealthy who use a variety of complicated tax-planning ploys to reduce or eliminate their tax bite.

In a shot across the bow, IRS Commissioner Doug Shulman told the American Institute of Certified Public Accountants to watch out: the agency will be pursuing tax preparers who help taxpayers hide income through complex off-shore structures.

Target

IRS recently formed a new global wealth unit, focusing on individuals worth at least $30 million who are sheltering wealth through convoluted business entities and arrangements. .

The agency will also target corporations engaging in aggressive tax planning using foreign entities and transactions

IRS Unit

IRS will take a unified look at the entire web of business entities controlled by rich individuals, including trusts, real estate investments, hedge funds, royalty and licensing agreements, private foundations and flow-through entities (typically partnerships and limited liability companies).

IExtra agents and specialists, including flow-through specialists and international examiners, will be hired.

Foreign Offices

IRS is opening new offices in Beijing, Panama City and Sydney to track funds flowing out of Europe and into Asia, and vice-versa.

The recent UBS case, in which Switzerland’s largest bank assisted U.S. taxpayers in evading billions in taxes, has provided impetus for the global initiative. Also, IRS will be working in concert with European efforts to crackdown on international tax havens.

CPAs

CPAs were forewarned about increased scrutiny and enforcement efforts. IRS cautioned them to be extra careful when signing off on complex tax strategies or devising such plans; otherwise, the new unit could make them a target as well.

Conclusion

The recent UBS revelations were an eye-opener for IRS and Congress. It is surprising that IRS has not previously employed a unified approach when auditing wealthy taxpayers with multifaceted business structures and foreign transactions.

The lesson: In this era of the global economy, tax authorities need to rethink their traditional approach of examining only a wealthy individual’s Form 1040 and not scrutinizing the underlying sources of income shown on the return, especially when foreign entities and transactions are implicated.

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BURNING DOWN THE HOUSE AT THE TAXMAN’S EXPENSE

Introduction

In recent years, it has become fashionable to purchase a small home on a large lot, then destroy the building and construct a “McMansion.” Under the tax law, demolishing an existing home is not deductible.

However, cleaver taxpayers have found a loophole that permits them to raze the home and obtain a charitable deduction in the process.

Donating the Home

It turns out that fire departments need homes to test their equipment, practice search and rescue and hone their fire-fighting techniques. Putting the two together, taxpayers donate the unwanted home to a fire department and claim a charitable deduction for its value.

The fire department then torches the structure for training and testing purposes.

IRS Response

IRS is not happy about this arrangement and has denied taxpayers a charitable deduction, stating taxpayers received a substantial benefit by having the home demolished.

IRS has also asserted that because the taxpayers did not donate the land, there was not a gift of the entire property – a potentially weak argument, since taxpayers claim a deduction only for the building.

Tax Court

In one case, the Tax Court ruled in favor of a taxpayer in just this situation, stating,

the benefit flowing back to [taxpayer], consisting of clearer land, was far less than the greater benefit flowing to the volunteer fire department’s training and equipment testing operations.

Conclusion

Donating a home to a fire department makes sense only if the state allows the destruction of the entire structure and the fire department accepts it as suitable for training.

Expect Congress to eventually step into the fray and side with IRS, but for now, burning down the house may generate a significant tax break.

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Tax Collectors Scour Social Networks to Nab Tax Debtors

Introduction

According to a recent Wall Street Journal article, tax authorities are searching the web, social networks and discussion boards to locate tax deadbeats.

Goggle searches and combing social networks, such as My Space, are fertile hunting grounds.

Searches

An enterprising Nebraska tax official Goggled a tax scofflaw and discovered the person just landed a high-paying marketing job. The result: Nebraska collected a tax tab of $30,000.

Cruising a discussion board produced the whereabouts of another tax delinquent, when he announced a new business location.

My Space

My Space, which by default, creates a public profile, is the tax sleuth’s social network of choice. For instance, a tax-challenged deejay announced on My Space he was working a large party and presto, the tax man swooped in to collect.

In contrast, Face book creates private profiles and many tax agencies refuse to create a false persona to troll there. Other social networks, such as YELP and Linked-in, can instantly supply valuable information to tax collectors.

Web sites

During tax payment negotiations, collectors read taxpayer web sites to determine whether a cry of poverty is contradicted by claims of success.

Bragging about new customers or expanded product lines may contradict the dire financial picture painted for tax authorities.

Conclusion

Tax collectors are using web searches, bulletin boards and social networks to track down debtors. The lesson: If you post personal or business information on the web, make sure you’ve paid your taxes first!

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