IRS audits target 'big boys'

Jim HamillI have written often about the declining resources devoted to the IRS, and how the agency has been forced to reduce the use of compliance audits. Congress both reduces the IRS resources and directs the agency to allocate more of the less to customer service.

IRS audits have long struck fear in the hearts of the bravest of men (using that term universally). The IRS audit is seemingly interesting. It has been the topic of many episodes of situation comedies. The sitcom character’s fear leads to hilarity.

Ralph Kramden, star of “The Honeymooners,” which ran from 1955 to 1956, was terrified by an impending audit when he learned that the $85 he won in a poker game was unreported income.

Archie Bunker of “All in the Family” similarly had unreported income, this time from driving a cab on Sundays. He told his wife Edith that “what a man does on his Sabbath is between him and his maker.” He also explained “I was exercising my loophole like the big boys.”

……………………………………………………….

A substantial body of research shows that if people think the “big boys” can cheat on their taxes, then why not the regular folk also? So IRS looks to publicize cases where big boys are caught cheating. (See Spiro Agnew, disgraced former U.S. vice president).

Bruce Springsteen had tax issues early in his period of fame. He says he came to the attention of the IRS after appearing on the cover of Time and Newsweek in the same week. He also said, “I never met anyone in New Jersey who paid his taxes.”

I don’t recall doing a lot of individual returns when I worked in Philadelphia, right across the river from New Jersey. Bruce may have been right about those Jersey boys and girls.

From Kramden to Bunker to the early Springsteen, audits have been portrayed in the popular media as the scourge of the common man. The working stiffs just don’t have access to the loopholes of the big boys.

Well IRS says, and we shall see if it aligns with what they do, that the big boys, the really big boys, are in for some heat. By fall they expect to launch “hundreds” of audits of high wealth individuals and thousands of audits of private foundations.

Private foundations are seemingly the charitable arm of the high wealth individual. Seemingly because they, in practice, often lack a charitable heart.

In the past IRS has been challenged in auditing the linkages between the high wealth individual and his or her private foundation. The new plan is to coordinate the efforts to create the tax equivalent of Poe’s tell-tale heart. Some high wealth people may soon be losing their sanity, a la the poor bus driver Ralph Kramden.

Not one of the top “hundreds” of wealthy people in the country? No private foundation? Before you exhale, check your tax return, assuming you are not from New Jersey, to see if you claimed a “Section 199A” deduction or reported income from a partnership (there’s 38 million of you people).

You, too, are in the crosshairs. The Section 199A deduction is the new (2018 on) deduction for qualified business income. It’s a high audit risk item. Partnership tax returns have new questions that will also identify audit targets.

As Mick Jagger might say (“Shattered”), don’t you know the audit rate is going up, up, up, up, up, to be a partner you must be tough, tough, tough, tough, tough.

Now these are, at this time, just the best laid plans of mice and men. It makes sense to target the big boys and their foundations. How many times will Ralph Kramden win $85 in a poker game? How often will Munson need Archie Bunker to drive his cab on Sundays?

But those big boys, now they’ve got some loopholes in the castle wall. Will IRS actually seal them? I actually hope so. Most CPAs do. It’s been a long time coming and the government does seem to need some money.

My only request? Stay out of New Jersey. It drives the New Yorkers crazy to know that no one in Jersey pays taxes.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]

Latest posts