By Steven J. Oshins, Esq., AEP (Distinguished)

According to The IRS is drafting plans to cut as much as half of its 90,000-person workforce, AP sources say, it appears that tax attorneys and accountants may be practicing their trades in a world where “almost anything goes”.

This is dangerous.

If this happens, there will likely be substantially less auditors which may cause a gunslinger wild, wild west mentality among taxpayers and their advisors.

Afterall, what’s the point in following the rules when the odds of being audited are a gazillion to one?

No, No, No!

No, no, no! As advisors, it is our job to follow the rules and to advise our clients to follow the rules. Advisors must resist the temptation to cut corners and take unreasonable risks, even if the odds of being audited and caught are slim to [close to] none.

For Example

For example, a client with a net worth of $100 million could take the position, after reading statistics showing that audits are down to close to zero, that he/she can simply make an $80 million taxable gift to his/her children and simply not file a gift tax return.

That’s way too easy, so why would the client need a gift tax planning expert when the likelihood is that nobody will audit it?

That’s a rhetorical question! Of course they will still need us. The reason is that if the client is caught, the bad still greatly outweighs the potential of getting away with it.

Criminal Tax Fraud

Regardless of the probabilities, whether the odds of being caught are 5 to 1, ten to 1, one hundred to 1 or one million to 1, this should be enough of a deterrent to maintain honesty. At least one would hope!

And civilly, interest and penalties can destroy a person financially.

Advisors

Many of our clients won’t use common sense and will have trouble resisting the temptation to take unreasonable risks once they realize that they will almost certainly get away with it.

Advisors must talk their clients off the ledge and, if the client isn’t willing to follow the rules, be willing to fire the client rather than succumbing to the temptation to take in a legal fee or accounting or other similar fee to assist with fraud and/or unreasonable risks.

The Gray Area

If there’s one opportunity that I see here for clients and advisors, it’s the sole-called “gray area”. In situations where it’s nowhere close to fraud, but it’s a risk that they wouldn’t have taken with a more heavily staffed IRS, such as a simple gift tax risk, then maybe we will be more likely to tell our clients that it’s a reasonable risk to take.

For example, we often advise our clients to avoid discounted installment sales to grantor trusts right before a large event such as a liquidity event. In those situations, we generally use Grantor Retained Annuity Trusts because the gift tax risk is close to zero.

If the IRS is heavily understaffed, we may be more likely, with full disclosure of the gift tax risk to our client, to advise the client to consider using the installment sale given the significantly lesser risk of a gift tax audit.

I’m not saying to do this. It’s simply an example of how our thinking may change in this scenario.

Conclusion

If the IRS reduces its number of workers, be careful to resist the urge to cut corners. But also be open to providing different odds to the client when the advice is simply about taking a risk that is reasonable and defensible, especially where the odds of an audit are lower than they are today.

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products about this topic.

• The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
• The Spousal Lifetime Access Trust: Avoiding the Reciprocal Trust Doctrine

ABOUT THE AUTHOR

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com. His law firm’s website is www.oshins.com