Current budget pressures and the negative effect of high unemployment on tax receipts have led to increased collection efforts from the IRS and state tax agencies. According to IRS Fiscal Year 2010 Enforcement Results, in 2004, 9,576 audits were conducted on taxpayers earning more than $1 million. In 2010, that number had increased to 32,494 audits. That is a 239% increase!
Beyond increasing the number of audits, other enforcement changes are also taking place. In November 2009, the IRS announced the creation of the Global High Wealth Industry Group. This new group is focusing exclusively on wealthy individuals, taking into account their total tax returns including business interests. Also noteworthy is the implementation of cost basis reporting, which is the purchase price of investments. This began implementation in 2011 and is another potential area of compliance concern for taxpayers. All of these efforts highlight the need to be prepared for inquiries.
Given the increased risk of audits and correspondence from the IRS and state tax authorities, clients often ask what they can do to mitigate this risk. The obvious first step is to have adequate records to substantiate all income and deductions. The most legitimate deductions can be denied unless taxpayers have adequate substantiation of the items in question. Please remember that you must maintain your receipts identifying the business purpose. A credit card statement will not suffice as an actual receipt. Equally important to minimizing your tax burden is having a competent tax professional to help navigate the complexities of the current tax code. Your tax professional, whether at Henssler or another firm, is able to not only assist you in minimizing your tax obligation, but also to advise you on what records are necessary to support deductions.
Even if a taxpayer does everything right and retains all of their documentation, this will not prevent the possibility of receiving a dreaded notice. Audit notices or correspondence concerning a particular item, whether reported or not reported on a return, are very common. Of the 32,494 aforementioned audits, 49% were not performed in person. They are actually carried out via correspondence. Dealing with correspondence notices can be as time consuming and as expensive as dealing with an in-person audit.
We frequently assist our clients in dealing with these matters and reconciling any differences between the taxpayer and the tax agency. This problem resolution process can involve phone calls, correspondence, meetings, preparation of additional filing forms, or a combination of these actions. It should not come as a surprise that all of these items can take quite a bit of time and result in a substantial invoice for our services. While we are not in a position to give away our time in responding to these matters, we are in position to offer prepaid representation that could result in substantial savings on professional fees should you receive any correspondence from the IRS or state agency.
Our prepaid representation option allows you to purchase a block of five hours of time to be used toward our fees to represent you for the entire three-year statute of limitations period relating to the return. The cost of this service is $175 per tax year, a substantial savings over our hourly rates ranging from $85 to $300. We offer this as a measure of price protection for our clients in dealing with these matters. Our intention is to give those clients who may be concerned about representation cost the option to secure what we hope would be an adequate block of time to resolve such matters. If you want to learn more please speak with one of our Tax Consultants at 770-429-9166 or at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
