Revenooers Zoom In on High Net Worthers
So you’ve got some dough, and a web of entities for business and family reasons. Get ready to hear from Uncle Sam, says IRS Commissioner Shulman.
“Many high wealth individuals make use of sophisticated financial, business, and investment arrangements with complicated legal structures and tax consequences. Many of these arrangements are above board. Others mask aggressive tax strategies,” quoth the Commish in a couple of speeches late last and early this year.
The result? Why, of course, the creation of a new audit team within the Large and Mid-Sized Business Division of the IRS, called the “Global High Wealth Industry (“GHWI” team.
“We want to better understand the entire complex economic picture of the enterprise controlled by the wealthy individual and to assess the tax compliance of that overall enterprise. We cannot do this by continuing to approach each tax return in the enterprise as a single and separate entity. We must understand and analyze the entire picture.”
Our friends at the law firm, Morrison Foerster, note that the first order of business for the GHWI lead auditor (should you be lucky enough to be chosen for scrutiny) will be to determine all of the investment, ownership and debt relationships surrounding the individual wealthy taxpayer. The second will be to decide whether to open parallel audits or essentially audit these entities via an individual audit of each.
IRS admits that, at least initially, they will be looking at individuals with tens of millions of dollars of assets or income. Going forward, they plan to take a unified look at the entire “web” of business entities controlled by a high wealth individual, which will enable IRS to better assess the risk such arrangements pose to tax compliance and the integrity of the tax system.
And if you do receive an initial “Dear Taxpayer” letter in this context, be aware that the Revenooers will probably already have done some homework on you. According guidance put forth by IRS for agents, “The exam team gathers publicly available information….and data internal to the IRS (e.g., current transcripts, data on related entities, etc.), then conducts a preliminary risk analysis to determine if an examination is warranted.”
Batten down the hatches.
And if you’re a Californian planning to vote for upcoming Proposition 19 (the “Regulate, Control, and Tax Cannabis Act”) get ready for new tax rules (and yes, new taxes) if it passes. Something like $1.2 billion of new taxes each year, we hear. Those would be sales taxes, income taxes, and who knows what other fees and exactions which the State will dream up.
And here’s one for ya: the proposition wouldn’t change the income and franchise sections of the California law. Income is taxable whether or not an activity is legal. But expenses ascribed to illegal activities are not deductible. And as we get it, since Federal rules will continue to treat marijuana deals as “illegal,” get ready to report all of your income derived from marijuana sales, but don’t count on being able to deduct any of your expenses!
Further, if you’re a “buyer,” plan on continuing to treat your cost as a nondeductible, personal expense–even if you use the stuff for medicinal purposes!
O Tempora, O Mores!
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation.
Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He is also a contributor to the recently published 13th edition of Tax Savvy For Small Business, published by Nolo. He can be reached at 831-7288, and welcomes comments below.