The financial landscape is ever-evolving and it is crucial for high-wealth individuals to stay informed about changes that may impact income and tax obligations. The Internal Revenue Service (IRS) has recently implemented new measures to scrutinize high-wealth individuals more closely. In this blog post, we will explore these changes and offer insights into legal and ethical ways to optimize your tax planning, ensuring compliance while minimizing your tax burden.
Understanding IRS Changes:
The IRS announced earlier this month that it plans to substantially increase its high wealth group audits with a particular focus on partnerships, complex corporate structures, pass-through entities and digital assets. There is an entire section of the Internal Revenue Manual now dedicated to the Global High-Wealth Group. With the increased windfall funding provided by the Inflation Reduction Act, the IRS plans to hire thousands of new staff members and invest heavily in new technology and algorithms to pinpoint areas of abuse. With sophisticated data analytics and increased resources, the IRS aims to identify potential areas of non-compliance and ensure that taxpayers are accurately reporting their income and deductions.
Key Changes:
- Increased Data Analytics: The IRS now employs advanced data analytics to identify discrepancies in income reporting and spending patterns, making it imperative for high-income individuals to maintain accurate and transparent financial records.
- Enhanced Auditing: High-income taxpayers are more likely to face audits, and the IRS has expanded its efforts to examine not only income, but also various deductions and credits claimed on tax returns.
- Focus on Offshore Accounts: The IRS is placing greater emphasis on offshore financial activities, targeting individuals with international investments or financial interests. Reporting requirements for foreign assets have become more stringent.
Legal and Ethical Strategies to Reduce Tax Burdens:
- Proactive Tax Planning: Stay ahead of potential issues by engaging in proactive tax planning. Regularly review your financial situation with experienced tax professionals and your team of Hollow Brook to identify opportunities for legal deductions and credits.
- Keep Clear and Consistent Entity Records: It is more important than ever to keep expense receipts and include notes of how the expense was used for the activities of an entity. It is not enough to just save a coffee shop or business lunch receipt, as you should instead jot down who you met with and topics of discussion during the meeting. Keeping clear records on the expense to prove it was both ordinary and necessary for the entity.
- Maximize Retirement Contributions: Leverage retirement savings as a powerful pre-tax planning tool to reduce income as much as possible. Some entities can combine defined benefit plans with defined contribution plans to maximize the amounts swept to the owner before income taxes apply. Driving down income using IRS substantiated rules will help reduce taxable income and secure your long-term financial future.
- Charitable Giving: Explore opportunities for charitable giving as a means of reducing your tax liability. Before contributing, entities should ensure that the recipient organization is recognized by the IRS as a qualified entity. Be sure to get third party appraisal on donated assets and always receive written acknowledgement from the receiving institution that substantiates your donation. Donating to qualified charitable organizations not only supports important causes but can also result in valuable tax deductions.
- Optimize Business Structures: For entity owners, optimizing the structure of your entities can have significant tax implications. Having too many entities, especially if they are paying each other large sums to create tax deductions, may be a red flag which warrants investigation by the IRS. Consult with tax advisors to explore options such as incorporating or restructuring your business to streamline your entity structure and enhance tax efficiency.
- Avoid Self-Dealing: Avoid toeing too close to the line of paying for personal expenses or luxury items through an entity as a tax deduction if it could appear to unduly benefit the owner of an entity rather than have a true entity purpose. Be sure to research and confirm expenses are accurate and appropriate before paying with entity funds and avoid comingling personal and entity expenses at all costs.
As the IRS adopts a more rigorous approach to auditing high-wealth individuals, it's essential to stay informed and proactive in managing your tax obligations. By employing legal and ethical strategies, you can optimize your tax planning, reduce your tax burden, and ensure compliance with the latest IRS regulations.
Our team at Hollow Brook is here to assist you in navigating these changes and recommend effective tax strategies tailored to your unique financial situation. If you have any questions or concerns, please don't hesitate to reach out.
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Disclaimer: Information provided is for educational purposes only. HBWM does not provide tax, legal, compliance, or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Further, HBWM makes no warranties with regard to such information, or a result obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.