The IRS is taking an increasingly aggressive and political anti-taxpayer tone in its public pronouncements. Successful entrepreneurs and businesspeople would do well to start listening – and step up the pace and intensity of their planning and preparation for what inevitably comes next.
A recent agency news release covered a few pedestrian points on “improved” service, and then launched into a burst of anti-taxpayer rhetoric that seemed out of place in a non-political agency’s communications with the public.
After singling out “high-income filers” as the agency’s target, to make sure they :pay the taxes they owe,” the release accused “the wealthiest taxpayers” of using an “increasingly complicated set of tools” to “hide their income and evade paying their share.” It then boasted that the IRS is “making delinquent millionaires pay up,” and singled out “tax-evading millionaires” and “millionaire non-filers” as subjects of a “crackdown.”
The implication of the release: All other taxpayers pay their fair share and don’t need further attention – but financially successful taxpayers are bad actors who need a “crackdown” for not paying their “fair share.”
The IRS’s well-publicized plan is to hire 87,000 new revenue collection agents at a total cost of $79 billion to collect additional revenue of $180 billion. The agency is making it crystal clear through its choice of pejorative language targeted at “millionaires” that it’s got “high income filers” in its gunsights as its target for where that money’s going to come from. And it’s making no bones about the fact that it thinks those taxpayers don’t want to pay their “fair share.”
If you’re in those upper tax brackets, in other words, you’re a bad guy. And the sheriff wants everybody to know that every one of you is under suspicion.
While there was a brief burst of news stories earlier this year alleging that African-American taxpayers were being audited at higher rates than others, and that poor taxpayers were as well, there’s really no question about what’s about to happen. “(The IRS) needs access to information about opaque income streams—like proprietorship and partnership income—that accrue disproportionately to high-earners,” read another IRS release.
So they’re making no bones about it. But the Tax Foundation’s data says that the top 1% of earners income level starts at $550,000 – which a successful two-earner family can easily reach these days. That means that it’s not just the private jet crowd that the IRS is coming for. The top 10% of earners in the U.S. pay 74% of all income tax collections in the US – and that income cohort starts at just $155,000.
That’s not “rich” by anyone’s definition except the IRS’s. A policeman married to a schoolteacher can easily hit this threshold – as can a solo income IT professional. So increasingly, all successful working people are “rich people” to the IRS.
So get ready. Given the hiring plans of the IRS, the ratio of agents to “rich people” will be approaching one to one.
How to prepare for this brave new world of IRS scapegoating and hyper-enforcement:
- Pursue tax minimization strategies. The notion of a taxpayer’s “fair share” is set by law – not by an individual politician and certainly not by an IRS spokesperson. Those laws set forth tax obligations, and ensuring you pay the minimum you owe – tax minimization and the strategies that accomplish it – is completely legal and not nefarious in any way. Any implication, by the IRS, a politician, or anyone else that it is somehow shady is ridiculous.
- Create audit-proof records and documentation on them. IRS auditors are coming for wealthy taxpayers, and the agency frequently uses heavy-handed tactics to induce fear and force settlements. That’s particularly when a taxpayer uses a tax minimization strategy – of which there are nearly 50 relatively common examples -- that individuals at the agency dislike or resent. The antidote is professional advice on structuring these strategies and fastidious recordkeeping about every step of every transaction undertaken to carry them out.
- If you’re a business owner, again – records, records, records. An absence of good records will create a significant problem for a taxpayer under scrutiny. And those “opaque income streams” mentioned above often flow from business ownership and will be viewed by the IRS as the weak points at which they can attack a taxpayer’s defenses. Document, document, document.
- Consider obtaining a tax opinion letter for the specifics of any tax minimization strategy you’re considering using. When a tax attorney or accountant looks at the circumstances and particulars of a given strategy and issues a legal opinion stating they view it as within the scope of the applicable law, any adverse judgement against you would carry no IRS penalty.
- Assemble a team. Make sure you have qualified advisors that you know you can turn to when the IRS comes knocking. Have your accountant, have a tax attorney (specifically) and be sure somebody on that team specifically focuses on tax minimization. You don’t have to retain these people and pay them enormous sums when not needed, but you do have to know who your “go team” is when a judgmental IRS agent shows up at your door.
It's a strange calculus, but if the IRS is going to start auditing everything that moves, the use of tax minimization strategies is going to soar. There’s significant upside and if auditors are coming anyway, precious little downside.
It’s not the Warren Buffets and Michael Bloombergs that are going to get crushed in this vice. It’s the successful doctor running her own practice. It’s the plumber who built a 20-employee contracting company. It’s that firefighter who’s married to that teacher.
Poet Maya Angelou is famous for saying, “When someone shows you who they are, believe them the first time.” The IRS administrators are showing us who they really are through their pronouncements – and high income taxpayers need to believe them. And take appropriate action.