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Dec. 1 — Being wealthy has its burdens and the fact that the Internal Revenue Service will likely take a greater interest in taxpayers who possess it is one of them.
The IRS audited 7.5 percent of taxpayers with adjusted gross income of more than $1 million in 2013, compared to fewer than 1 percent of taxpayers with adjusted gross income of less than $200,000.
“As adjusted gross income goes up, the audit rate increases dramatically,” Mark Nash, a tax partner with PricewaterhouseCoopers LLP in Dallas, said Dec. 1.
Ultra-high net worth audits since 2009 have been coordinated through the IRS's global high net worth industry group, Nash told reporters on a PwC call about what to expect in 2016.
The term “ultra-high net worth” has yet to be exactly defined. “The IRS only says it is people who have tens of millions of dollars of income or assets,” he said.
What is the IRS looking for when it surveys the books? Personal and business assets and individuals with “a very complex tax structure,” Nash said. IRS agents won't comb through every number, but will focus on areas of perceived abuse.
Audits of high net worth individuals are done by experienced agents who take a holistic approach that includes looking at the taxpayer's Form 1040, their gift tax returns and all the entities they control. Agents are trying to get a complete picture of the wealth the taxpayer has, he said.
They want to see where the taxpayer sits with respect to all the entities that he or she controls, and there is always a focus on maintaining the integrity of that structure, he said. They want to make sure the individual isn't camouflaging personal expenses as business expenses.
Two areas of particular interest for auditors are the personal use of aircraft and charitable contributions. The former is an area where the agency has seen much abuse, Nash said.
Airplanes generate very large deductions in terms of depreciation and expenses relative to the income that taxpayers would have to pick up if they are using simple computations, he said.
The IRS will be looking at the logs of corporate aircraft to see who is on those flights and determine whether they were primarily used for business or personal purposes, whether the appropriate amount of income has been assumed by the taxpayer and whether the deductions have been appropriately limited.
The IRS is also looking for documentation of charitable contributions. Agents are aware that taxpayers are donating to charity auctions and attending galas where tickets and tables are involved and they want to make sure those contributions have been appropriately reduced for the value of any items received, Nash said.
When a taxpayer makes a charitable contribution of more than $250, he or she must get a letter from the charity stating that no goods or services were received in return. “The goods and services piece is what the IRS is really concerned about with respect to the high net worth donor,” he said.
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