P30 .• • . .... • How the IRS Is Probing the Rich By Karen Rube THE INTERNAL REVENUE SERVICE IS corning down hard on wealthy taxpayers these days-and not just those who have foreign accounts. . In an attempt to recoup some of the $350 billion in taxes the • federal government estimates is due each year but not collected; the IRS is going where the money ST- is: to folks with fat bank accounts, pricey properties, big incomes, large investments and complex tax profiles. While the audit rate for the general population of taxpayers was 1.1% last year, it.112.5 8.4% for taxpayers With income of more than $1 million, and 18.4%-up from 10.6% the year prior-for those bringing in. $10.nallion or more. With the crackdown' on the- Wealthy still in its infancy-. it was-just last year that the IRS started ramping up its"' ' Global High Wealth Indus; try unit, staffed with the . agency's most sophisticated', 4-) auditors—the audit rate is likely to climb higher. '¶'We Want to make ware we have a meaningft.1DrL.:,- encethroughc;i.)t the inC(1.7.0 spectrum?" says Steve Miller, deputy cemmissio"...e for services and enforcement. A traditional audit involves a single auditor reviewing ' a Form 1040, used by individuals to report an- - income. But for a wealthy -.2 taxpayer "you can't just look at a t 1040 and know what's goingronr o says Bryan Skarlatos,,a tax attorney at Kostelanetz & Fink in New York.' Now, with its new wealth unit,' i .the IRS doesn't just come•in.With one person-it's a team with expertise in a number of areas;' says Alan Kufeld, a principal in the family-office group at the adVisory fwm Rothstein Kass in New York. There are a number of triggers that may lead the.IRS to home in on a- taxpayer's returns. Here _.„ his ye m. fa th Si g The feds are auditing nearly 20% of those f: earning more than $10 million a year. Protect yourself. ' Property Transfers: The IRS is digging up property-transfer records in .1 many states and-checking to see if corresponding gift-tax returns have been filed. • Making a gift of property to heirs has become far more papa- ' far since housing values began declining in 200G, because lower values reduce the ' tax consequences to the giver and the heirs stand to enjoy any future appre- ; ciation of the property. A gift-tax return must be filed, for any gift valued at more than the annual $13,000 gift-tax excluMon. But that, doesn't necessarily mean that taxes must be who give more than, the ' giftrtax exclusion. can avoid the .35% gift tax by tapping the onetime estate-tax exemption, which is much , EFTA01118570 higher For nine years through last year, you could use a -total of $1 million of estate-tax exemptions for gift-giving. For this year and next year, the exemption is $5 million or $10 million for couples. Once the exemption is used up, you can give as midi as $13,000 to as many individuals as you like each year ($26,000 for a couple) free of gift tax. So for anyone who gave away property valued at more than $1 Million in recent years and didn't file a gift-tax return, the IRS may come looking to collect penalties and interest on unpaid taxes. Certain Investment Losses: . The IRS is sniffing out false claims of investment losses by up owners of Subchapter S•corporain tions or partnerships. - • - iee When these folks invest in anre-, other, secondary buSiness, the law prohibits using losses incurred of. from it to. Offset income in their has Subchapter S corporation or partMu-. nership, unless they are actively' lucs involved in the secondary bustin ness. wer Among other things, that the means at least 500 hours of particnces ipation each year. - • and "You could be a-full-time attortand ney who invested in a car washers any a 5% owner," says -Neil.Bec0urtrpm- ney, a partner at accounting firm the J.H. Cohn in Roseland, N.J. "If you aren't involved on a ft-tax regular basis and" the car wash -must runs a loss," he- says, "you can cl for only use:the losses to offset other 1 val- passive income; hut not active inmore come from your business. Taxpayie an- era are sometimes fast and loose 13;000 when it tomes to this, saying they exelu- were involved in a business when t that they weren't really." • nceesin that Home-loan interest deductions: at be Big deductions for interest on irs who mortgages and home-equity loans an the are a major•red flag. - ion can- deductions for. mortgage ingift terest are allowable for as much ye. one.- as a combined Si million of total exemp- indebtedness on. first and second much homni, plus $100,000 on a home- - equity loan in joint filings. "The IRS believes there are many situations where the limitation Is - not being adhered to," Becourtney says. "If you take $1.1 million in debt, at a 6% interest rate, that would be $66,000 of interest. Any more than that starts to raise questions." When mortgage interest deductions exceed $70,000, the IRS is likely to take a second look, he adds. Foreign Income: The IRS's well-publicized amnesty program for taxpayers with unreported foreign income ended Sept 9, and taxpayers who run afoul of the rules mn foreign-income reporting now risk not only stiff penalties but also jail time. , The IRS is going straight to banks and investment firms like Credit Suisse to demand the names of U.S. clients with foreign accounts. Says Skarlatos of Kostelanetz & Fink: "Not. only is the IRS !Coking at people who opened accounts in Switzerland, but in countries like India, Israel, Hong Kong and the Far East in general." -Spenders: In a new prograin launched this year, the IRS is cross-checking taxpayer? reported incomes with their credit-card records. • So if you took a luxury world tour in a year you drew a modest income and left a trail on plastic, be prepared to defend your tax return. Through these creditcard checks, the IRS Mopes to snag, among others, unscrupulous filers of Schedule C, used by taxpayers reporting profits and losses from businesses. • All in all, Schedule C. filers are estiniated to report just 51% of their income, leaving-some $68 - billion in unpaid taxes each year. . In view of the uncollected taxes of every kind, and the IRS's estimate that for every dollar it spends on eriforcenient, it brings in as much as $10, it's no wonder the agelicy's latest focus is on the big money. is (sang tj s fees). net the yo 1 Hee lbe ed eiy.• EFTA01118571