The Internal Revenue Service (IRS) has been increasingly aggressive in their investigation of high income tax payers. While last year the general audit rate was 1.1 percent, the rate for taxpayers with income in excess of $1 million was 8.4 percent. Now, more than ever, wealthy Americans should be vigilant in the maintenance of their tax obligations.
There are a few areas upon which the IRS has chosen to focus. If you fall into one of these categories, it is prudent to consult with your tax attorney as soon as possible to ensure you have no outstanding unpaid taxes. Individuals in these categories may even be more likely to attract the attention of the Internal Revenue Service:
1. Property Transfers
In many states, the IRS is investigating property-transfer records, checking to see if corresponding gift-tax returns were filed. Making a gift of property has become increasingly popular since housing prices fell in 2006; lower property values reduce the tax obligation of the giver, and the receiving heir stands to enjoy any future appreciation of the property’s value.
If you are considering giving such a gift, make certain that a gift-tax return is filed for any gift valued at more than the annual $13,000 gift-tax exclusion. In some cases, however, taxpayers giving a gift of property in excess of $13,000 may utilize the one-time estate-tax exemption, which is a much higher limit.
2. Investment Losses
The IRS is looking carefully for any erroneous claims of investment losses made by owners of Subchapter S corporations or partnerships. The IRS prohibits the use of losses incurred by a lesser, secondary business to offset income made by the Subchapter S corporation or partnership. The only exception is when the individual is actively involved in a secondary endeavor, which means spending a minimum of 500 hours per year involved in that business. Taxpayers can sometimes play a bit with this portion of the return, claiming they were actively involved in the second business when in actuality they were not.
3. Foreign Income
As many already know, the IRS is cracking down considerably on anyone with undeclared foreign income. Their well-publicized amnesty program ended at the beginning of September, leaving taxpayers who still have unreported foreign income to face harsh penalties and jail time on top of the unpaid tax amount.
4. Large Expenditures
In a program launched only this year, the IRS has begun crosschecking income reported on tax returns with credit-card records. Through these checks, the IRS hopes to catch numerous cases of delinquent behavior, most notably those who falsely filed a Schedule C, which is frequently used by taxpayers who report profits and losses from businesses.