DS9 Document EFTA01118570

P30 .• • . .... • How the IRS Is Probing the Rich By Karen Rube THE INTERNAL REVENUE SERVICE IS corning down hard on wealthy tax- payers these days-and not just those who have foreign accounts. . In an attempt to recoup some of the $350 billion in taxes the • federal government estimates is due each year but not collected; the IRS is going where the money ST- is: to folks with fat bank accounts, pricey properties, big incomes, large investments and complex tax profiles. While the audit rate for the general population of taxpayers was 1.1% last year, it.112.5 8.4% for taxpayers With income of more than $1 million, and 18.4%-up from 10.6% the year prior-for those bringing in. $10.nallion or more. With the crackdown' on the-Wealthy still in its infancy-. it was-just last year that the IRS started ramping up its"' ' Global High Wealth Indus; try unit, staffed with the . agency's most sophisticated', 4-) auditors—the audit rate is likely to climb higher. '¶'We Want to make ware we have a meaningft.1DrL.:,- encethroughc;i.)t the inC(1.7.0 spectrum?" says Steve Miller, deputy cemmissio"...e for services and enforce- ment. A traditional audit involves a single au- ditor reviewing ' a Form 1040, used by individuals to report an- - income. But for a wealthy -.2 taxpayer "you can't just look at a t 1040 and know what's goingronr o says Bryan Skarlatos,,a tax attor- ney at Kostelanetz & Fink in New York.' Now, with its new wealth unit,' i .the IRS doesn't just come•in.With one person-it's a team with exper- tise in a number of areas;' says Alan Kufeld, a principal in the family-office group at the adVisory fwm Rothstein Kass in New York. There are a number of triggers that may lead the.IRS to home in on a- taxpayer's returns. Here _.„ his ye m. fa th Si g The feds are auditing nearly 20% of those f: earning more than $10 million a year. Protect yourself. ' Property Transfers: The IRS is digging up property-transfer records in .1 many states and-checking to see if corresponding gift-tax re- turns have been filed. • Making a gift of property to heirs has become far more papa- ' far since housing values began declining in 200G, because lower values reduce the ' tax consequences to the giver and the heirs stand to enjoy any future appre- ; ciation of the property. A gift-tax return must be filed, for any gift val- ued at more than the an- nual $13,000 gift-tax exclu- Mon. But that, doesn't neces- sarily mean that taxes must be who give more than, the ' giftrtax exclusion. can avoid the .35% gift tax by tapping the one- time estate-tax exemp- tion, which is much , EFTA01118570 higher For nine years through last year, you could use a -total of $1 million of estate-tax exemptions for gift-giving. For this year and next year, the exemption is $5 million or $10 million for couples. Once the exemption is used up, you can give as midi as $13,000 to as many individuals as you like each year ($26,000 for a couple) free of gift tax. So for anyone who gave away property valued at more than $1 Million in recent years and didn't file a gift-tax return, the IRS may come looking to collect penalties and interest on unpaid taxes. Certain Investment Losses: . The IRS is sniffing out false claims of investment losses by up owners of Subchapter S•corpora- in tions or partnerships. - • - iee When these folks invest in an- re-, other, secondary buSiness, the law prohibits using losses incurred of. from it to. Offset income in their has Subchapter S corporation or part- Mu-. nership, unless they are actively' lucs involved in the secondary bust- in ness. wer Among other things, that the means at least 500 hours of partic- nces ipation each year. - • and "You could be a-full-time attor- tand ney who invested in a car washers any a 5% owner," says -Neil.Bec0urt- rpm- ney, a partner at accounting firm the J.H. Cohn in Roseland, N.J. "If you aren't involved on a ft-tax regular basis and" the car wash -must runs a loss," he- says, "you can cl for only use:the losses to offset other 1 val- passive income; hut not active in- more come from your business. Taxpay- ie an- era are sometimes fast and loose 13;000 when it tomes to this, saying they exelu- were involved in a business when t that they weren't really." • ncees- in that Home-loan interest deductions: at be Big deductions for interest on irs who mortgages and home-equity loans an the are a major•red flag. - ion can- deductions for. mortgage in- gift terest are allowable for as much ye. one.- as a combined Si million of total exemp- indebtedness on. first and second much homni, plus $100,000 on a home- - equity loan in joint filings. "The IRS believes there are many sit- uations where the limitation Is - not being adhered to," Becourt- ney says. "If you take $1.1 million in debt, at a 6% interest rate, that would be $66,000 of interest. Any more than that starts to raise questions." When mortgage inter- est deductions exceed $70,000, the IRS is likely to take a second look, he adds. Foreign Income: The IRS's well-publicized am- nesty program for taxpayers with unreported foreign income ended Sept 9, and taxpayers who run afoul of the rules mn foreign-in- come reporting now risk not only stiff penalties but also jail time. , The IRS is going straight to banks and investment firms like Credit Suisse to demand the names of U.S. clients with foreign accounts. Says Skarlatos of Kostelanetz & Fink: "Not. only is the IRS !Coking at people who opened ac- counts in Switzerland, but in coun- tries like India, Israel, Hong Kong and the Far East in gen- eral." -Spenders: In a new prograin launched this year, the IRS is cross-check- ing taxpayer? reported incomes with their credit-card records. • So if you took a luxury world tour in a year you drew a modest income and left a trail on plastic, be prepared to defend your tax return. Through these credit- card checks, the IRS Mopes to snag, among others, unscrupu- lous filers of Schedule C, used by taxpayers reporting profits and losses from businesses. • All in all, Schedule C. filers are estiniated to report just 51% of their income, leaving-some $68 - billion in unpaid taxes each year. . In view of the uncollected taxes of every kind, and the IRS's estimate that for every dollar it spends on eriforcenient, it brings in as much as $10, it's no wonder the agelicy's latest fo- cus is on the big money. is (sang tj s fees). net the yo 1 Hee led be eiy.• EFTA01118571