Articles

Wealthy Taxpayers, Corporations Should Heed Warnings Implied by IRS Budget Increase by Jeffrey M. Mutnik, CPA/PFS

Posted on April 21, 2021

Included in the Biden Administration’s proposed budget for fiscal 2022 is an additional $1.2 billion in funding to help the IRS ramp up its tax enforcement efforts after more than a decade of spending and staffing cuts. What this means for taxpayers is a likely increase in IRS audits and heightened scrutiny of tax compliance, especially for corporations and high-net-worth individuals. Whether taxpayers can survive unscathed largely depends on their record-keeping practices and their ability to substantiate their tax positions and claims of income, deductions, and credits.

It is no secret that the U.S. tax code is complex and rife with grey areas that taxpayers may use to their advantage to legally reduce their taxable income and/or tax liabilities. However, it is critical that taxpayers at all income levels ensure the methods they use for purposes of tax efficiency do not cross the line into tax evasion, which is the intentional concealment of income and/or information from the IRS or other taxing authorities. Whereas a simple mistake on your tax return can result in penalties and interest on unpaid amounts, willful tax evasion can lead to substantial fines, penalties, interest and even jail time for taxpayers and their accomplices, which many include employees and/or a spouse.

According to a recent study conducted by the National Bureau of Economic Research, the prevalence of tax evasion and the sophistication with which taxpayers attempt to underreport income increases as income rises. It is for this reason the IRS plans to allocate a significant portion of its 2022 budget to reviews and audits of tax returns filed by those taxpayers with the most incentive to pay less, specifically corporations and wealthy individuals.

Generally, the IRS can conduct an audit during the three years subsequent to a taxpayer’s return filing date. If it detects a substantial error, the agency may be able to extend the audit period to six years. Once selected for an audit, taxpayers’ bear the responsibility to prove the accuracy of their previously filed tax returns, including demonstrated proof of all items of income, deductions and credits. Such support may include bills, dated receipts and cancelled checks or other proof of payments; legal documents, including divorce papers, loan agreements and property settlements; records of employment; documentation of damages from theft or loss, including property appraisals; and Schedule K-1s reporting shareholders’ shares of income, losses, deductions and credits. If taxpayers lack this documentation, the government may use its own methods to reconstruct the taxpayers’ income and expenses.

To prepare for the prospect of a better funded, more aggressive IRS, businesses and taxpayers at the upper income levels should take the time now to meet with experiences independent CPAs and tax advisors to review their current tax positions to ensure tax compliance, identify tax risks and even uncover potential opportunities to maximize tax efficiency.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.