Millionaires, billionaires beware


The rhetoric coming from Washington these days about “millionaires and billionaires” is not just rhetoric.  How do I know this?  As the baseball sage Casey Stengel said, “You could look it up!”
The IRS 2010 Data Book, released in March, provides a lot of interesting information.  For the year beginning Oct. 1, 2009 and ending Sept. 30, 2010, the IRS processed 230 million tax returns.  They provided $467 billion in refunds and collected $2.3 trillion for the federal government.  They assisted more than 78 million taxpayers through telephone help lines or at walk-in sites.
The publication also mentions, “The IRS pursued its international agenda to ensure that taxpayers cannot walk away from their responsibilities by hiding money in offshore accounts.  Over the past few years, our voluntary disclosure program and enforcement efforts have brought thousands of taxpayers back into the system, and those numbers are growing.”
Curiously, there are also some interesting statistics in the report that are not specifically mentioned.  For instance, in 2009 the odds of being audited were 1 in 100 according to a Bloomberg report.  In 2010, the overall rate moved up to 1.11%.  Up 11%: not such a big deal.  However, the number of “millionaire and billionaire” (those with incomes above $10 million) audits moved up to 18.4% in 2010 from 10.6% in 2009, which is almost double.
As IRS Commissioner Doug Shulman said at a meeting of the New York State Bar Association Taxation Section, “We’re looking for and finding points of leverage – what some call ‘nodes’ of activity – where multiple people not paying taxes can be detected.  Financial institutions are one such potential node of activity. Promoters of evasion schemes are another.”
The IRS has started an Offshore Voluntary Disclosure Initiative, providing information in eight different languages to reach taxpayers and preparers who are non-native English speakers.  By coming forward about undisclosed offshore accounts, they stand a chance of avoiding criminal prosecution.
Fair enough.
So, with the increased scrutiny through audits from the IRS, how do you protect yourself from being one of the unlucky?  Well, most audits are not purely attributable to bad luck.  There are things you can do to help decrease your odds of being selected.  One is to document all expenses related to your business.  Another is to report every nickel of income.  Claim sensible, not outlandish, deductions.  Avoid portraying a hobby as a business venture.  Sign your return, and work with a really good tax preparer.
Clever boxers learn how to knock out their opponents.  One strategy is to throw incessant jabs at their foe for several rounds and lull them into a false security that your only weapon is a jab (I used this against Jimmy Young in Madison Square Garden).  This provides the element of surprise when you follow a jab with a right cross and a left hook.  Similarly, the IRS is not the only government agency going after “millionaires, billionaires and business owners.”  The Department of Labor (DOL) has promised to update the retirement plan landscape.  Three major rule changes are scheduled for the near future.
1.  Covered Service Providers (CSP) must fully describe their services and fees.  This rule was supposed to take effect in July, but the date has been pushed back to January 1, 2012.  It requires CSPs (financial advisors, financial consultants or third-party administrators who expect to receive $1,000 or more in direct or indirect compensation for their services) to detail their compensation and/or fee structure to fiduciaries.  CSPs also include financial advisors or Third Party Administrators who act as fiduciaries or Registered Investment Advisors for plan sponsors.  If applicable, the CSP must detail any fees that may be charged for recordkeeping along with recordkeeping methods.
2. Fiduciaries must detail plan and fee information for plan participants (employees).  If such information isn’t provided to plan participants after Nov. 1, 2011, then a plan participant or beneficiary may claim a violation of fiduciary duty on the part of the plan sponsor (that’s you, if you’re a business owner).
The new regulations require fiduciaries to disclose (and update) the following:  Rules related to the dissemination of investment instructions for the plan; plan fees and expenses paid from participant accounts (along with a breakdown of these fees, i.e. investment management fees, administration fees, cost of advice fees); and any other specific fees or charges that may be drawn from a plan participant’s account.
3. The DOL wants to expand the definition of an ERISA fiduciary.  Under this planned rule change, anyone who advises a retirement plan would be considered one.  A group of nearly 30 Congressional Democrats have protested this expanded definition in a letter to Labor Secretary, Hilda Solis, contending that it would backfire and eventually reduce access to investment education and information for plan participants.  The concern is that the definition of “fiduciary” will become so vague that even the most basic education and advice could fall under ERISA status.
As Ronald Reagan once said, “The nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual.  Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial.  Member FINRA/SIPC.  He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.

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