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.
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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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