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Is the IRS Preparing for Audit Storm Among High Net-Worth Individuals? - Pat Soldano

by Thomas C. Berg, JR., CFA, ASA, CVA & David M. Eckstein, CFA

IRS Releases Inflation Reduction Act Strategic Operating Plan: Is an Audit Storm Brewing for High Net-Worth Individuals?

 

In early April, the IRS released its long-anticipated Inflation Reduction Act Strategic Operating  Plan (“IRA Plan”) funded by nearly $80 billion over the next 10 years. The Congressional Budget Office has estimated that this plan will increase tax revenue by more than $180 billion, while the IRS believes it could be much higher. 

 

The IRA Plan is expected to increase focus and compliance efforts on complex partnership structures, large corporations, and high net-worth individuals, where in recent years it has not had sufficient resources to do so. As a result, audit rates are expected to increase from today’s low levels to much higher levels as the IRA Plan ramps up. Of the approximate $80 billion appropriation, it is expected that $47.6 billion of it will be used for enforcement efforts. 

Notably, the IRA Plan states, “the IRS will increase enforcement activities to help ensure tax compliance of high-income and high-wealth individuals” as it has not had sufficient resources for enforcement in the past to ensure “they are paying the taxes they owe.” As a result, there is a likelihood of increased audits of gift, estate, and personal income tax returns due to the dramatic increase in resources. 

Due to the increased examination of high-income and high-net-worth individuals, one may expect valuations used by these individuals will encounter significantly greater IRS attention going forward. Along those lines it is expected that valuation issues historically targeted by the IRS,  such as discounts for lack of marketability and control, tiered discounts, tax-affecting pass-through entities, pre-sale transfers, IRC 2701 and 2036 issues, formula transfers, split-dollar life insurance and conservation easements will be ripe for audit by an expanded IRS. 

In order to increase enforcement, “the first wave of specialists hired and onboarded to increase compliance coverage rates for high-income and high-wealth individuals” will occur in 2023.  According to the plan, this hiring wave will focus on the addition of accountants, attorneys, and  data scientists with the education and experience to pursue these tax filers. During 2023 and 2024, the IRS will attempt to hire nearly 20,000 new employees, and approximately 7,200 of these employees will be for enforcement.

In summary, it is anticipated that there could be a meaningful uptick in estate tax, gift tax, and charitable deduction income tax audits for high-income and high-net-worth individuals going forward. As a result, when illiquid assets are involved, taxpayers and their advisors are encouraged  to hire top-tier valuation providers that will prepare excellent work products and be at the ready to leverage their extensive experience defending valuations at the examination or appellate level, or in Tax Court, if necessary. 

DISCLAIMER

 The information provided in this publication is only general in nature. It has been prepared without taking into account any specific objectives, financial circumstances, or needs. Accordingly, MPI disclaims any and all guarantees, undertakings, and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever (including human or computer error, negligent or otherwise, or actual, incidental, consequential or any other loss or damage) arising out of or in connection with any use or reliance upon the information or advice contained within this publication. The viewer must accept sole responsibility associated with the use of the material in this publication, irrespective of the purpose for which such use or results are applied. This material should not be viewed as advice or recommendations. This information is not intended to, and should not, form a primary basis for any investment, valuation, or other decisions. MPI is not acting as a fiduciary, an expert, or advisor in any capacity whatsoever in providing the information set forth herein. The information set forth herein may not be relied upon and  is not a substitute for competent legal and financial advice. The viewer of this material is cautioned and advised to consult with his or her own legal and financial counsel in evaluating the information provided herein. 

About MPI
MPI (Management Planning Inc.) is a business valuation, litigation support, forensic accounting and M&A advisory firm providing valuations for a variety of tax, financial reporting, litigation and other business applications, as well as corporate advisory services to business owners and their representatives.

MPI has over 80 years of experience preparing Business Valuations for estate and gift tax planning and estate tax administration matters. MPI’s work product is used as the foundation for succession planning strategies implemented by advisors for numerous types of businesses and assets. MPI has decades of experience presenting and defending its work product to IRS agents and engineers at the initial audit and appellate levels. Our valuation conclusions have withstood scrutiny under audit and been accepted as filed at a high rate, which has the effect of helping clients avoid the perils and costs of tax court or ongoing tax disputes with the IRS.

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The need for fact-based reporting of issues important to multi generational businesses and protecting a lifetime of savings has never been greater. Now more than ever, multi generational businesses and family businesses are under fire. That’s why Family Enterprise USA is passionately working to increase the awareness of issues important to generationally-owned family businesses built on hard work, while continuing to strengthen our presence on Capitol Hill. The issues we fight for or against with Congress in Washington DC include high income tax rates , possible elimination of valuation discounts, increase in capital gains tax , enactment of a wealth tax , and the continued burden of the gift tax , estate tax and generation skipping tax .


Family Enterprise USA promotes family business and job creation, growth, and sustainability by advocating for family businesses , their lifetime of savings, and the issues they face running their businesses every day. Some of the issues we fight for or against with Congress in Washington DC are high Income tax rates, possible elimination of valuation discounts, increase in capital gains tax , enactment of a wealth tax , and the continued burden of the gift, estate taxes and generation skipping taxes . Family Enterprise USA represents and celebrates all sizes and industries of family businesses and multi-generational employers.

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Family Enterprise USA is the organization that represents all family businesses on a national level in DC; it is not unique to any industry. Family Enterprise USA is different from other organizations because it represents and advocates for the families of family businesses and the issues, they face running their businesses every day. Our sole mission and purpose is to promote family businesses and their job growth in America. We also support the work of Family Business Centers across the country. We hope your family will choose to be a member of Family Enterprise USA.