Planners have taken note of the fact that clients with incomes of $1 million or more were twice as likely to be audited by the IRS in 2011 than they were in 2009. Several say they are taking steps in anticipation of still greater vigilance on the part of the agency.

“We’ve noticed a significant increase in the last couple of years in audits,” said Jeffrey Thomasson, founder of the second largest RIA in the country, Oxford Financial Group in Carmel, Indiana. “It’s causing the advisor community here in the Midwest to be much, much more intentional about the advice they give to clients in making sure everything is documented appropriately.”

Out in Los Angeles, Jeff Fishman founder of JSF Financial Planning, said he hasn’t seen a notable increase in audits in recent years but thinks that could change.

“Statistically you’ve got to expect there’s a greater likelihood,” Fishman said. “If anything it illustrates why it’s important to be cautious.”

Some of the increase in the percentage in audits is due to a drop in the number of taxpayers with $1 million or more in income to declare, a change likely due to the downturn in the economy. In 2009 the IRS audited 6.42% of the 441,715 returns filed by this demographic. That percentage jumped to 12.48% of a total 291,831 returns last year, according to the agency’s report on its 2011 enforcement.

With historically high $5 million exemptions on both federal estate and gift taxes set to expire next year, Thomasson has seen this heightened scrutiny from the IRS in both of these sections of his clients’ annual returns.

He offered the following example: It’s common for the older generation of some families to sell shares in a company to the younger generation. Years ago, he said, if the older generation took a discount on that purchase price, they generally provided less supporting documentation to the IRS.

Not so today. Now families make sure to hire an appraiser – who they can document is licensed – to estimate the value of a company at the time of the transaction. The appraisal, which can run up to 30 pages or longer, is then attached to the tax filing related to the sale.

The cost of such an appraisal, Thomasson said, carries a price tag of between $5,000 to $25,000, given that companies can be valued in innumerable ways from a multiple applied to total revenues or a multiple applied to total sales. But the cost of going to this trouble is less than the cost of missing this step, he said.

Once the documentation is properly filed, the clock begins ticking on a three-year statue of limitations after which the IRS may not go back to investigate the sale. However, if the paperwork is not properly filed, Thomasson said, no statute of limitations applies and the IRS can go back and investigate at any later point of its choosing.

New complexities of this nature have prompted clients to be more careful about who they select to advise them on tax planning, Thomasson said.

“They are more appreciative of a CPA who gets it and tries to keep them from running problems,” he said. “We only refer our clients to CPAs or estate lawyers who do cross their T’s and dot their I’s. The risk of being casual today is consequential.”

Ann Marsh writes for Financial Planning.





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