IRS Focuses on High-Income Non-Filers to Recover Millions in Unpaid Taxes
High-income earners who have not been filing their tax returns are in the crosshairs. A recent IRS news release announced an extensive plan to root out high-income taxpayers who have failed to file federal income tax returns in more than 125,000 instances since 2017. The agency estimates that this campaign will involve hundreds of millions of dollars in unpaid taxes.
The IRS hasn’t had the funds to pursue non-filers since 2016, but with the new Inflation Reduction Act, passed into law in 2022, and a directive from Treasury Secretary Janet Yellen, the IRS now has the resources to address this pervasive compliance issue – and it’s pulling out the stops.
At the start of March 2024, the IRS began its campaign by sending noncompliance letters to more than 25,000 people who earned more than $1 million per year, and 100,000 people with incomes falling between $400,000 and $1 million, who have failed to pay their taxes between 2017 and 2021. All of these cases have shown up on the IRS’ radar through third party sources – like Forms W-2 and 1099s – which show they have earned income but haven’t followed up with a filing. Since the IRS is not aware of any possible credits or deductions these filers may have, they have no clear estimate of the potential revenue that they hope to earn through this initiative. However, the third party information points to financial activity of more than $100 billion and the IRS estimates that hundreds of millions of dollars of unpaid taxes are in question. Conversely, because the IRS does not have all the details of the potential filings in hand, some of these non-filers may not owe the IRS anything at all and may even be due a refund.
The IRS expects taxpayers to take immediate action upon receipt of its compliance letter, formally known as the CP59 notice. Ignoring them means additional follow-up notices, higher penalties, and the potential for stronger enforcement measures. The IRS also advises non-compliant taxpayers to consult with their tax professionals for help filing late tax returns and paying delinquent tax, interest, and penalties. The failure-to-file penalty amounts to 5% of the amount owed every month – up to 25% of the tax bill.
For high-end non-filers, your time may be up. If the IRS’ manhunt applies to you, be sure to reach out to a tax professionals to refile, address your tax balance, and regroup.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
The ‘Personal’ in Personal Finance
Picture this: Two buddies hiking through the woods, when suddenly, out pops a massive bear. One guy takes off like a rocket – survival instincts kicking in. The other, oddly composed, yells after him, “What’s the point? You can’t outrun a bear!” The sprinting hiker retorts, “I don’t need to outrun the bear, I just need to outrun you!”
Sometimes, competition is the key to success. Beating your colleagues in the company fantasy football league makes you the water cooler hero. Getting in on a high-flying stock will make you a star at wedding conversations. Those feel-good victories definitely have their place, and may save your life in a bear attack.
But here’s the twist: When it comes to your personal financial goals, it’s not about beating anyone. It’s not even about the S&P 500. Imagine someone beating the S&P 500 by 10% a year, but at age 83 they’re sitting on a park bench, struggling to pay their electric bill. What did the outperformance bring them? Bragging rights won’t keep the lights on.
So when it comes to your personal finances, remember:
- Your goals, your rules: Whether it’s buying a house, retiring in comfort, or traveling the world, your financial goals are all about you. What your neighbor or coworker is doing is irrelevant. Focusing on your individual needs and aspirations will help create a personalized investment plan rather than chasing someone else’s dream.
- The risk factor: Remember, not all investments are created equal. Trying to “win” by picking riskier stocks might get you those sweet bragging rights…for a while. But if it jeopardizes your long-term financial stability, is it really worth it? Picking investments based on your risk tolerance keeps you focused on the bigger picture.
- Time is on your side: Investing is a long game. Sure, seeing your portfolio outperform the market feels great, but what if those gains come with a side of heart-palpitating-volatility? A slow and steady strategy tailored to your needs sets you up for sustainable, long-term growth.
So, the next time you start comparing your portfolio to your buddy’s, stop. Remember, it’s not a competition. Focus on building a financial future that secures the life you want to live. After all, what good is bragging about outperforming a bear market if you can’t pay your bills?
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Fighting the Last War
As an investor, it’s easy to fall prey to “recency bias” – the tendency to base investment decisions on recent market performance rather than taking a broader and more forward-looking perspective.
Fighting the last war is a natural human tendency that results from our innate desire to find patterns and make sense of the world around us. But, in the world of investing, this can be a dangerous mindset to adopt. For example, after the 2008 financial crisis, many investors rushed to allocate billions of dollars to so-called “black swan” strategies that were designed to protect against rare and extreme events. This reaction was misguided, though. It came after the feared black swan, and at that point, was a useless strategy.
A more drastic example? A study conducted by Fidelity Investments on their flagship Magellan fund, during Peter Lynch’s famed tenure, from 1977-1990. His average annual return during this period was 29%, as compared to 14.47% of the S&P 500 index. This is a remarkable return over the 13-year period and made him one of the best investors ever. It was clear that investors were aware of the fund’s stellar performance as inflows made it one of the largest mutual funds of its time. Given that amazing performance, you would expect that Magellan Fund investors got really rich during Lynch’s tenure. Shockingly, a study by Fidelity Investments found otherwise. The average investor lost money under Lynch’s leadership. Rub your eyes and read that again: The average investor lost money in the Fidelity Magellan fund under Peter Lynch’s tenure during a period of time when the fund returned around 29% annually. How did the average investor lose out on Magellan’s success?
Markets swing up and down. When the market went up, the Magellan fund rose even higher. This excited and enticed investors who rushed to invest. But when the market and the fund declined, investors immediately sold. At every robust period, investors moved money into the fund, and at every decline, they sold – with Magellan’s value swinging lower than before. Recency bias killed Magellan’s performance.
Similarly, in the current market environment, investors are reacting to what worked in 2022, without considering whether those strategies will continue to be successful in the future. To avoid the pitfalls of fighting the last war, investors must adopt a progressive approach. This means taking a longer-term view of the investment landscape and considering how trends and risks might evolve over time. By focusing on the future, investors can avoid getting caught up in short-term market movements and can make better-informed investment decisions.
Be aware of this tendency, and look out of the windshield as opposed to the rear-view mirror. You’ll make more knowledgeable investment decisions and avoid getting caught off guard by unexpected events. You won’t get caught up in the latest market fads. Instead, you’ll be primed for long-term financial success.
This material has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for, legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
Use Nongrantor Trusts to Bypass the Salt Deduction Limit
If you reside in a high-tax state, you may want to consider using nongrantor trusts to soften the blow of the $10,000 federal limit on state and local tax (SALT) deductions. The limit can significantly reduce itemized deductions if your state income and property taxes are well over $10,000. A potential strategy for avoiding the limit is to transfer interests in real estate to several nongrantor trusts, each of which enjoys its own $10,000 SALT deduction.
Grantor vs. nongrantor trusts
The main difference between a grantor and nongrantor trust is that a grantor trust is treated as your alter ego for tax purposes, while a nongrantor trust is treated as a separate entity. Traditionally, grantor trusts have been the vehicle of choice for estate planning purposes because the trust’s income is passed through to you, as grantor, and reported on your tax return.
That’s an advantage, because it allows the trust assets to grow tax-free, leaving more for your heirs. By paying the tax, you essentially provide an additional, tax-free gift to your loved ones that’s not limited by your gift tax exemption or annual gift tax exclusion. In addition, because the trust is an extension of you for tax purposes, you have the flexibility to sell property to the trust without triggering taxable gain.
Now that fewer families are subject to gift taxes, grantor trusts enjoy less of an advantage over nongrantor trusts. This creates an opportunity to employ nongrantor trusts to boost income tax deductions.
Nongrantor trusts in action
A nongrantor trust is a discrete legal entity, which files its own tax returns and claims its own deductions. The idea behind the strategy is to divide real estate that’s subject to more than $10,000 in property taxes among several trusts, each of which has its own SALT deduction up to $10,000. Each trust must also generate sufficient income against which to offset the deduction.
Before you attempt this strategy, beware of the multiple trust rule of Internal Revenue Code Section 643(f). That section provides that, under regulations prescribed by the U.S. Treasury Department, multiple trusts may be treated as a single trust if they have “substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries” and a principal purpose of the arrangement is tax avoidance.
Bear in mind that to preserve the benefits of multiple trusts, it’s important to designate a different beneficiary for each trust.
Pass the SALT
If you’re losing valuable tax deductions because of the SALT limit, consider passing those deductions on to one or more nongrantor trusts. Consult with us before taking action, because these trusts must be structured carefully to ensure that they qualify as nongrantor trusts and don’t run afoul of the multiple trust rule.
5 Ways to Strengthen Your Business for the New Year
The end of one year and the beginning of the next is a great opportunity for reflection and planning. You have 12 months to look back on and another 12 ahead to look forward to. Here are five ways to strengthen your business for the new year by doing a little of both:
1. Compare 2019 financial performance to budget. Did you meet the financial goals you set at the beginning of the year? If not, why? Analyze variances between budget and actual results. Then, evaluate what changes you could make to get closer to achieving your objectives in 2020. And if you did meet your goals, identify precisely what you did right and build on those strategies.
2. Create a multiyear capital budget. Look around your offices or facilities at your equipment, software and people. What investments will you need to make to grow your business? Such investments can be both tangible (new equipment and technology) and intangible (employees’ technical and soft skills).
Equipment, software, furniture, vehicles and other types of assets inevitably wear out or become obsolete. You’ll need to regularly maintain, update and replace them. Lay out a long-term plan for doing so; this way, you won’t be caught off guard by a big expense.
3. Assess the competition. Identify your biggest rivals over the past year. Discuss with your partners, managers and advisors what those competitors did to make your life so “interesting.” Also, honestly appraise the quality of what your business sells versus what competitors offer. Are you doing everything you can to meet — or, better yet, exceed — customer expectations? Devise some responsive competitive strategies for the next 12 months.
4. Review insurance coverage. It’s important to stay on top of your property, casualty and liability coverage. Property values or risks may change — or you may add new assets or retire old ones — requiring you to increase or decrease your level of coverage. A fire, natural disaster, accident or out-of-the-blue lawsuit that you’re not fully protected against could devastate your business. Look at the policies you have in place and determine whether you’re adequately protected.
5. Analyze market trends. Recognize the major events and trends in your industry over the past year. Consider areas such as economic drivers or detractors, technology, the regulatory environment and customer demographics. In what direction is your industry heading over the next five or ten years? Anticipating and quickly reacting to trends are the keys to a company’s long-term success.
These are just a few ideas for looking back and ahead to set a successful course forward. We can help you review the past year’s tax, accounting and financial strategies, and implement savvy moves toward a secure and profitable 2020 for your business.