IRS “Wealth Squads” Invasive, Expensive

by | Aug 9, 2010 | In The News, Tax Planning, The Economy, Weekly Column | 2 comments

The U.S. Government may be taking its war on the rich to the next level. The IRS is now contemplating making wealthy Americans prove how they earned their wealth.

“Our government has gone from the ridiculous to the sublime in its mad attempt to reduce the debt!” writes Rich Colman, a Boston attorney and financial planner. Colman says the easy method would be for the country to try a combination of raising taxes and/or reducing spending. Instead, the IRS has come up with the novel strategy of auditing how people obtained their wealth. He notes this is simply a way of raising taxes without raising the tax rate.

Colman envisions a scenario where an IRS agent comes to your home and starts estimating its value, looking at you as if you are the clone of the Ponzi scheme king, Bernie Madoff. “Did you really earn that money you have in those brokerage accounts?” He knows that less than 9% of Americans have assets in excess of $100,000. “You don’t look smart enough to have accumulated so much!” You answer that your wealth was accumulated through frugal savings over the decades. “Then where is the proof?!”

To prove this you will need to dig through decades of records, some of which no longer exist since the government only requires you to keep records for three years. When you can’t prove how you accumulated your net worth, Colman says the IRS will calculate what they feel someone of your means would have normally accumulated. Any amount over that estimate they will assume you accumulated illegally. They will then calculate how much money you owe the government in back taxes and penalties.

Colman suggests this may result in you having to liquidate assets and possibly even jail time. “Although this scenario seems like something out of a Woody Allen movie, the IRS recently announced that they are seriously contemplating this type of audit!” he says. The current administration believes that years of reduced audits have enabled many people to evade taxes. Says Colman, “The new “pot of gold” that the IRS believes it can seize with some changes in its rules and procedures is related to uncovering the trillions of potential IRS revenue, hidden or not reported in previous years.”

To pull this off, Colman says, the IRS will create a new division, the Global High Wealth Exam Group, charged with scrutinizing the past tax returns of high net-worth individuals. This group will be comprised of “wealth squads” of highly trained and experienced agents with the skills to delve into the examination of the returns and the people who prepared the returns. “Each of these squads will have its specialist focused on one particular area of tax evasion, i.e. financial securities, exempt organizations, etc.,” says Colman.

What does this all mean to you? For now, perhaps, not much. Colman says initially the audits will only involve those worth tens of millions of dollars. “If the IRS’s new team finds a few criminals in this group, then it won’t be long before the government widens its new strategy to every person with incomes over $250,000.” This would be similar to what happened with the once-rare alternative minimum tax.

Colman suggests the new wealth audits may even create a whole new industry: professionals schooled in protecting your assets from being grabbed by the government.

Apparently our government has a money script that anyone who has wealth must have accumulated it illegally. One of the destructive consequences of this money script will be the considerable cost for those who will be forced to prove they have followed the rules.

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