Advisers need to stay on top of tax game as IRS eyes audits for millionaires

Advisers will need to brush up on their tax return auditing prowess in 2016 now that the IRS is weighing an inspector general’s report recommending a renewed focus on millionaires.
The tax collection agency currently focuses far too much of its attention on high-income taxpayers, who earn at least $200,000 on their Form 1040s, a Treasury Inspector General for Tax Administration report found. Instead, the tax agency should expand its reach to include the ultra-high-net-worth taxpayers who make $1 million or more, the report said.
For advisers, that means double checking tax returns, collaborating with tax specialists and reminding clients to document everything they claim on their returns.
“It is great for advisers who are on top of their game to review hot areas,” said Jon Gassman, founder of Gassman Financial Group in New York. “All advisers should be involved in reviewing income tax returns and pointing out to [clients] what the hot issues are.”
The IRS said in its management response within the inspector general’s report that the agency spends much of its time on high-income taxpayers making at least $200,000 because of their sometimes complex financial situations, which can risk non-compliance. The IRS also saw budget cuts, which led to fewer audits.
Still, the IRS agreed to the recommendation to examine more segments of the taxpayer population.
1.5% TO 12.1%
In 2014, the IRS audited 1.5% of the more than 4 million tax returns filed in calendar year 2013 — a total of 62,000 returns. In comparison, the agency audited 12.1% of the 52,000 tax returns for taxpayers who earn $5 million or more, or about 6,000 tax returns, according to the inspector general’s report.
“Just because they may focus on certain areas doesn’t mean taxpayers with less than $5 (million) or $10 million will go unnoticed,” Mr. Gassman said. “It is important for advisers to know what the triggers are.”
Mr. Gassman, who is a certified financial planner and certified public accountant, said triggers for audits include rental properties, schedule fees, major donations, mortgage interests and medical claims.
A revamped IRS auditing process may even help advisers, since resources will be more properly distributed across the agency.
“It’s not the best use of resources,” said Chris Benson, a CPA for L.K. Benson & Co. in Baltimore. “As we know whenever we try to get in touch with the IRS, they are way understaffed.”