Will IRS Funding Proposals Result in More Audits for Wealthy Clients?
Financial advisors play a big role in strategic tax planning for their clients. That means staying up to date on  Financial advisors play a big role in strategic tax planning for their clients. That means staying up to date on proposed changes to the tax law, such as a bill Sen. Elizabeth Warren introduced that would add more than $30 billion to the Internal Revenue Service budget. According to a press release from Warrens office, the funding would provide the IRS the resources it needs to go after wealthy tax cheats and close the tax gap. The bill would rebuild and strengthen the IRS by permanently removing the IRSs base budget from the annual appropriations process and providing $31.5 billion in mandatory annual funding.  The release adds that the new funding would allow the IRS to fairly enforce the tax code, modernize its (information technology) systems and improve taxpayer services.  [SUBSCRIBE: Get the weekly U.S. News newsletter for financial advisors. ] Proposed Budgetary Changes at the IRS  Its not just Warren proposing budgetary changes at the IRS. Earlier this year, President Joe Biden put forth the American Families Plan that would boost IRS tax laws enforcement with $80 billion in funding over the next decade. The U.S. Department of the Treasury says that would cover hiring specialized enforcement staff and modernizing antiquated information technology. The Treasury Department also points out that the additional resources will go toward enforcement against those with the highest incomes, and audit rates will not rise relative to recent years for those earning less than $400,000 in actual income.  Warren announced her proposal in May  before the nonprofit news organization ProPublica obtained tax returns going back 15 years for many wealthy Americans. The data includes the returns of billionaires such as Mark Zuckerberg, Bill Gates, Elon Musk and Warren Buffett. ProPublicas cache of documents ignited discussions in the media about the U.S. tax code, which allows many high net worth individuals to pay little in income tax, relative to their holdings. Yet, Jason Priebe, partner and wealth advisor at Priebe Wealth in Maple Grove, Minnesota, says the leak of tax returns of uber-wealthy Americans was a non-story. We already knew they were avoiding paying taxes by not selling stock and using real estate assets for depreciation deductions, he says. [READ: Advisors Recommend Caution Ahead of Potential Capital Gains Tax Changes.] Always Keep Thorough Records  Priebe says his firm recommends that clients maintain records. That way, if the IRS questions their return, they can promptly respond and possibly avoid an audit. He says clients should take special care in areas the IRS may target, such as larger-than-average deductions, higher-than-average charitable deductions, and losses on business or rental income. Nolan Menachemson, a financial advisor at Tenpath Financial Group in Farmington, Connecticut, says ultrahigh net worth individuals typically face higher scrutiny from the IRS. He notes that his firm encourages clients to be accurate, thoughtful and detailed when completing their tax returns. Aggressive interpretation of tax law is always risky, and the IRS already corrects returns without a full audit, he says. When we assist in tax preparation, we insist that all documentation is stored electronically, and trends are tracked year over year.  When it comes to tax code changes, Menachemson says the IRS publishes any new rules, and professional tax software generally incorporates the changes immediately, so advisors and certified public accountants have the most up-to-date planning tools at their disposal. Menachemson advises clients to use a professional to assist with tax preparation, combined with tax planning as part of their investment management strategy. Julio Gonzalez, founder and CEO of Engineered Tax Services in West Palm Beach, Florida, says the IRS funding proposals will result in the wealthy continuing to hire top accountants to help them pay the smallest amount of taxes allowable. Wealthy clients have nothing to worry about in this regard, Gonzalez says. The only people (the plans) can actually hurt are the middle class, who cannot afford high-priced accountants and attorneys, he adds. [Read: Financial Advisors Eye Bidens Plan for Estate Taxes in 2021.] IRS Has a Collection Problem  Bruce Hyde, a partner, chief compliance officer and wealth advisor at Round Table Wealth Management in Westfield, New Jersey, has been discussing possible tax changes with his clients. Hyde says politics play a role in the Biden and Warren proposals, but he acknowledges the IRS does have a real problem collecting taxes that are owed. That tax gap, he says, has been discussed for a long time, but it also follows the narrative of the Biden administration (that says) the wealthiest people need to carry a greater portion of the overall tax burden.  Hyde adds that clients should take steps to protect themselves in the event they are audited. The most important thing people should always do is to maintain detailed documentation for anything that goes into, or should go into, their tax return, he says. People need to understand the burden of proof always lies with the taxpayer.  Hyde says the ProPublica data should not have a material effect on audits. Each year, the IRS determines the types of returns they will choose and certain tax positions that are more likely to trigger an audit, he says. Thats in addition to random samples of returns to audit. But to be clear, just because you get audited, doesnt mean you will owe more tax, Hyde says. originally appeared on usnews.com