Another Reason to Do It Right the First Time

As highlighted in a recent Wall Street Journal blog post, IRS audits of taxpayers reporting $10 million or more in income increased sharply last year. In 2008, 9% of taxpayers in this group were audited. In 2009, that number increased to 10%, and in 2010, there was a significant jump – 18% of taxpayers in this income range were audited. There’s also been an increase, although not as dramatic, in the number of audits for Americans in other high income groups, starting with those who make more than $500,000 per year.

The spike in audits is courtesy of the relatively new “Global High Wealth Industry Group” of the IRS. This segment of the IRS came into being in 2009. It employs experts who are experienced in sorting through the entities and complex transactions used by the very wealthy to reduce their tax liability. The group doesn’t simply focus on income tax concerns, it’s designed to take a big-picture view; for example, coordinating gift tax and income tax audits.

Apparently, undergoing an audit by the Group can be an unusually difficult experience. The experts employed by the group are used to dealing with corporations with legal and accounting departments equipped to deal quickly and efficiently with IRS demands. These same types of demands made on a family tend to be burdensome, especially given the short timeframe typically allowed for a response.

The lesson to be learned from this taxation development is twofold. First, it’s more important than ever to make sure you’re the estate planning and income tax planning are coordinated because, under the new approach, the IRS is more likely to scrutinize both. Second, it’s essential to do it right – the first time. Dotting your i’s and crossing your t’s has the potential to save you time, money, and stress.