Many financial advisors with high-net worth-clients like to tout their investments as being “tax-efficient” and will work with clients to set up their portfolios to minimize tax liability.

Although that is fine in principle, the approach loses a lot of that efficiency if those efforts attract an Internal Revenue Service audit.

Advisors must steer clients away from things like sophisticated tax shelters that attract unwanted IRS attention, says Harry Scheyer, principal member at Pinnacle Financial Advisors in Bala Cynwyd, Pa.

In addition, advisors should counsel clients when doing their taxes against being too aggressive in claiming business deductions or if they have an S corporation, against paying themselves too little so as to avoid the payroll tax for Medicare and Social Security, he said.

“Congress has reduced the IRS’ budget, and that has led the IRS to cut its audit staff. Now most audits are of middle-class people because those cases are easy,” Scheyer says.

“The IRS auditors don’t like to go after wealthy investors generally because they know wealthy taxpayers have skilled [certified public accountants] doing their taxes and that they hire skilled lawyers when they are audited,” he says. “So if your clients are wealthy, keep their investments simple, don’t let them get too greedy, and they generally don’t get audited.”

David Levi, a senior managing director of CBIZ Inc. in Minneapolis, agrees that client greed can be a magnet for IRS audits, especially when it comes to Schedule C sole-proprietorship taxes, where the trigger is too aggressive claiming of “business” deductions that are actually personal expenses, and S-Partnerships, where the temptation is to report pass-through income as dividends instead of as salary.

Levi’s advice is to counsel those clients who have a business -- for example an investment business or a profession of some kind -- to team up and establish a partnership involving more than one person.

“It could even be the spouse,” he says.

With a partnership, the allocation of income from the partnership entity to the several partners and the addition of Schedule K-1 forms to report this pass-through income onto individual 1040 returns, makes it much less likely that auditors will even look at a client’s return, Levi says.

Look carefully, too, at investments in partnerships that promise tax-sheltered income, he says.

“If you invest in a crappy tax shelter partnership and that partnership gets audited by the IRS, then you will be audited, too,” Levi says.

He also cautions that while the IRS may be reducing its audits of wealthier taxpayers because of staff cuts, hard-strapped state governments are stepping up theirs because they need the revenue.

“So running afoul of state auditors, for example by trying to claim residence at your summer home in a non-income-tax state, can get you audited in a state like Minnesota, and when state auditors nail a taxpayer, they report it to the IRS, which can trigger a federal tax audit,” Levi says.

Dave Lindorff spent five years as a China correspondent for Businessweek and has written for The Nation and Salon.com.