Category Archives: Accounting

IRS Needs Better Controls over Partial Payment Agreements

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The Internal Revenue Service is not always properly monitoring or establishing the partial payment installment agreements it enters into with taxpayers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that taxpayers who enter into a partial payment installment agreement will not fully pay all of their delinquent tax liability, so it is important that PPIAs are carefully and accurately administered. If the IRS does not effectively pursue collection of unpaid tax through the use of PPIAs, it could create an unfair burden on the majority of taxpayers who fully pay their taxes on time, the report noted.

When establishing a PPIA, the IRS is required to complete a financial analysis of the taxpayer and assess the financial condition of taxpayers with a PPIA every two years. TIGTA reviewed a random sample of 100 PPIAs and found that the two-year reviews were not always properly performed and that some PPIAs were established without a complete financial analysis and/or manager approval.

To begin the two-year financial assessment, the IRS performs an automated review process of PPIAs at the two-year mark. However, the automated two-year review processes did not occur in eight (or 10 percent) of the 84 PPIAs requiring a two-year review.

If the automated review process determines that the financial condition of the taxpayer may have improved, a manual review is required. However, the manual reviews were not performed properly for 15 (or 52 percent) of the 29 PPIA cases for which a manual review was required. IRS procedures do not require managers to review or approve the results of the two-year review of PPIAs.

In addition, 15 of the 100 PPIAs sampled were established without a complete financial analysis. Without a complete financial analysis, there is a higher risk that the taxpayers are not paying the maximum amount they can afford or that they are unable to afford the amount in the agreement, TIGTA. Furthermore, 34 of the 100 PPIAs did not have evidence that the manager approved the PPIA. The absence of documented manager approval indicated that managers are not reviewing the PPIAs before they are established.

The IRS Collection Process Study report recommended that the IRS expand the use of PPIAs by offering a modified minimum PPIA to all individual taxpayers in uncollectible status. The report estimated that if PPIAs were offered to 230,000 individual taxpayers classified as unable to pay, the collection potential could be as high as $69 million annually. TIGTA was advised that the IRS does not have plans to implement this recommendation due to limited resources, however.

TIGTA made several recommendations to improve controls over the two-year review process and establishment of PPIAs. TIGTA also recommended that IRS management test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status.

In response to the report, IRS officials agreed or partially agreed with six of the seven recommendations. The IRS plans to revise procedures to improve controls over the two-year review process and plans to establish controls to prevent PPIAs from being established without manager review or approval.

The IRS did not agree with the recommendation to test the viability of expanding the use of PPIAs, saying it conducted similar tests with the Offer in Compromise program for taxpayers in currently not collectible status, which did not yield significant results.

TIGTA argued that the IRS’s tests involved taxpayers who were asked to consider applying for an Offer in Compromise, not a PPIA. Because of the differences between the two programs, TIGTA said it does not believe it is appropriate to draw conclusions about taxpayer willingness to establish a PPIA. For example, unlike a PPIA, taxpayers entering into an Offer in Compromise may have to pay 20 percent of their balance due before the IRS will consider their request.

“We are proud of the actions taken to improve the PPIA program,” wrote IRS Deputy Inspector General for Audit Michael R. Phillips in response to the report. “We have enhanced tracking reports for PPIAs, revised notices and improved telephone systems to better serve customers.  Through training and Internal Revenue Manual updates, employees are well aware of PPIAs as evidenced by their increased use over the past several years.”

Phillips generally agreed with TIGTA’s recommendations for financial analysis and managerial approval, but said he was concerned that the date ranges chosen for the sample review might have skewed the results of TIGTA’s findings. The sample of reviewed cases only included PPIAs established between Jan. 1, 2008 and July 1, 2009 and did not include any recent agreements, he pointed out.

“While this was necessary for the two-year review portion of the process, your findings may not be indicative of current case work,” he wrote. “In addition, your review did not include any supporting documentation submitted by the taxpayer or any physical supporting documentation associated with a case file when a PPIA was established. Analysis of supporting documentation may provide additional insight into a taxpayer’s ability to repay a liability. As such, we will conduct a review of recently established PPIAs and supporting documentation to determine if proper financial analysis, managerial review, and managerial approval are being done.”

He agreed to include PPIAs in campus operational reviews of installment agreements to ensure Internal Revenue Manual procedures were followed, but added that since PPIAs represent less than 2 percent of installment agreements, he did not believe it was appropriate to conduct separate National Quality Review System product line reviews for PPIAs.

With respect to the Collection Process Study recommendation to test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status, he said he did not believe it was an efficient use of the IRS’s limited resources.

“We conducted two similar tests with the Offer in Compromise (OIC) program for taxpayers in currently not collectible (CNC) status,” Phillips noted. “These taxpayers received a letter of solicitation informing them of the OIC program as a viable collection alternative. Even when offered an alternative that would fully resolve their accounts, the response rate was less than 3 percent.”

Based on the assumptions in the report, Phillips agreed with TIGTA’s proposed outcome measures for taxpayers who had their monthly payments reduced. However, he did not agree with the outcome measure for offering a modified PPIA to taxpayers in CNC status, noting that similar tests have not yielded significant results and do not mirror the estimated outcomes identified in the Collection Process Study.

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Congress Probes IRS Seizure of Medical Records

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Leaders of the House Energy and Commerce Committee have sent a letter to Internal Revenue Service acting chief Daniel Werfel requesting information about a March 2011 IRS search and seizure of as many as 60 million medical records from a California health care provider.

 

The letter comes after a recent lawsuit was filed over the IRS’s alleged seizure of over 10 million American patients’ medical information in the course of executing a warrant related to a former employee’s financial records. As the IRS will be tasked with implementing much of President Obama’s signature health care reform law, committee leaders said they are concerned about what restrictions and safeguards are in place to ensure that Americans’ medical information remains protected.

The letter to Werfel was signed by House Oversight and Investigations Subcommittee chairman Tim Murphy, R-Pa., Oversight and Investigations and Health Subcommittees vice chairman Michael C. Burgess, M.D., R-Texas, committee chairman emeritus Joe Barton, R-Texas, and committee vice chairman Marsha Blackburn, R-Tenn. They wrote, “(T)he Committee on Energy and Commerce is investigating allegations that the Internal Revenue Service (IRS), in the course of executing a search warrant at a California health care provider’s corporate headquarters in March 2011, improperly seized the personal medical records of millions of American citizens in possible violation of the Fourth Amendment to the United States Constitution.”

The letter continued, “According to a March 14, 2013, report by courthousenews.com, the unnamed health care provider is now suing the IRS and 15 unnamed agents in California Superior Court alleging that the agents stole more than 60 million medical records from more than 10 million American patients during a search conducted March 11, 2011. The warrant authorizing that search was apparently limited to the financial records of a former employee of the company and in no way authorized the sweeping confiscation of the personal medical records of millions of Americans who had no connection to the initial IRS investigation. … In light of these allegations and in anticipation of the IRS’s increased role in implementing health care under the Patient Protection and Affordable Care Act, we are writing to request information regarding your agency’s ability to both protect the confidential medical information of millions of Americans and respect the safeguards imposed by HIPAA [Health Insurance Portability and Accountability Act].”

The lawsuit cites a Forbes article in alleging that the medical records included “information on psychological counseling, gynecological counseling, sexual and drug treatment, and other sensitive medical treatment data.”

The committee leaders asked Werfel to respond the letter by Tuesday, June 25.

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Net Investment Income Tax: What You Need to Know

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Now that the 2012 tax season is over, it’s time to focus on tax planning for 2013. One of the most significant tax changes this year is the Net Investment Income Tax (NIIT), which went into effect on January 1, 2013 as a result of health care reform enacted in 2010. Here’s what you need to know.

What is the Net Investment Income Tax?

The Net Investment Income Tax is a 3.8% tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts, referred to as modified adjusted gross income (MAGI).

What is Included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, long and short term capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.

What is Not Included in Net Investment Income?

Wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans are not included in net investment income.

Individuals

Individuals whose modified adjusted gross income exceeds $250,000 (married filing jointly) or $200,000 (single filers) are taxed at a flat rate of 3.8% on investment income. Net Investment Income Tax is paid in addition to other taxes owed and threshold amounts (e.g. $200,000 for single filers) are not indexed for inflation.

Non-resident aliens are not subject to the tax; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien for the purposes of filing “married filing jointly” tax return, there are special rules. Please consult us if you have any questions.

Because investment income is generally not subject to withholding, taxpayers should be aware that the NIIT might affect tax liability for the 2013 tax year. In addition, it’s possible that even lower income taxpayers not meeting the threshold amounts could be subject to the tax if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough.

Give us a call if you are expecting a windfall this year. We’ll help you come up with a strategy such as an installment sale, minimizing AGI, or figuring out the best timing for sale, that will help you to avoid or minimize taxes when you file your 2013 return next year.

Sale of a Home

The Net Investment Income Tax does not apply to any amount of gain excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer’s income is over the MAGI threshold amount.

Estates and Trusts

Estates and Trusts are subject to the Net Investment Income Tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2013, this threshold amount is $11,950.

Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts, and some trusts, including “Grantor Trusts” and Real Estate Investment Trusts (REIT) are not subject to NIIT at all.

It should be noted that non-qualified dividends generated by investments in a REIT are considered taxable income and taxed at ordinary tax rates. As such, they may be subject to the Net Investment Income Tax.

If you need guidance on the topic of Net Investment Income Tax and estates and trusts, don’t hesitate to call us.

Reporting and Paying the Net Investment Income Tax

Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041.

Individuals, estates, and trusts that expect to pay estimated taxes in 2013 should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For employed individuals, NIIT is not withheld from wages; however, you may request that additional income tax be withheld. Call us if you need assistance with this.

Wondering how the new tax affects you? Give us a call @ (310) 820-1080 or www.onts9.com. It’s never too early to start tax planning!

 

IRS Modifies Policy for First-Time Penalty Relief

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The Internal Revenue Service has modified its “first time abate” policy, which provides a one-time consideration of penalty relief, based on the taxpayer’s compliance history, for taxpayers who have been subjected to a first-time penalty charge.

 The recently updated policy modifies the IRS first time abate policy for penalty relief, the IRS said in an email to tax professionals Friday. This type of penalty removal is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history.

According to the policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments.

The FTA relief only applies to a single tax period for a taxpayer, the IRS noted. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive, the IRS cautioned.

The IRS said it would base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets reasonable cause criteria.

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IRS Tries to Pre-Verify Tax Refunds

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The Internal Revenue Service is exploring ways to improve its verification process before issuing tax refunds, but it needs to do a better job of managing the risks, according to a new government report.

The report, from the Government Accountability Office, noted that the IRS receives few information returns before issuing most tax refunds. In 2012, the IRS issued 50 percent of tax year 2011 refunds to individuals by the end of February, but had only received 3 percent of information returns.

Most information returns are not received by the IRS until after mid-April, and the IRS conducts the first match of tax and information returns in July, with subsequent matches in February and May of the following year. For tax year 2010, an average of over a year passed before the IRS notified taxpayers of matching discrepancies, which the IRS recognizes is a long time lag that burdens taxpayers. For tax year 2011, IRS matched over 140 million individual income tax returns against the 1.6 billion information returns it received from third parties such as employers. Generally, this match does not occur until well after refunds are issued.

In early 2011, then-IRS Commissioner Doug Shulman outlined a vision for a “Real Time Tax” system, a strategy to improve verification by matching third-party information to income tax returns during the pre-refund screening process rather than after refunds are issued. In 2012, the IRS launched a three-phase exploratory effort to assess the tradeoffs inherent in pursuing Real Time Tax.

Moving the matching of third-party information during the pre-refund screening process could have significant impacts on taxpayers, third parties, and IRS processes and systems. But it could also require congressional action to authorize changes to the Tax Code, including, perhaps, changes to some information return due dates. Considerations associated with moving the due dates include whether third parties have the information they need before the current due dates and whether they would have sufficient time to detect and correct errors before reporting. IRS officials noted that they do not yet consider Real Time Tax a “project” and have not decided whether to pursue Real Time Tax.

The GAO report acknowledged that the IRS is generally following leading practices in its Real Time Tax exploratory effort by, for example, dedicating a team and defining program goals. However, the IRS did not develop an overall timeline because IRS management views Real Time Tax as a broad goal, and officials wanted to avoid causing concern that the IRS had already decided on a path. Without a timeline for the overall exploratory effort, though, the IRS cannot know if its efforts will be completed in even the broad time frames the IRS is considering, the GAO pointed out, and Congress may not be able to determine what legislative action might be required.

IRS officials stated that managing risk is a high priority, but they have not developed an overall risk management framework, as they are still in the early stages of the exploratory effort, according to the GAO. Officials said they plan to further develop the strategy if the IRS pursues the Real Time Tax effort. But without systematically identifying and evaluating the risks of Real Time Tax options, IRS officials may miss critical factors that could complicate the effort, the GAO warned. A record of prior risk analyses could help prevent unnecessarily repeating the same analyses.

The GAO recommended that the IRS identify time frames for the exploratory effort’s critical phases and activities and develop a risk management framework for Real Time Tax. IRS agreed with the GAO’s recommendations.

“We agree with GAO’s selection of leading practices for exploratory efforts, such as real time tax, and appreciate acknowledgement of IRS efforts in implementing four of the six leading practices selected,” wrote IRS Deputy Commissioner for Operations Support Beth Tucker in response to the report. “The IRS also agrees with GAO’s recommendation. As the IRS continues to engage stakeholders and explore the real time tax concept, we will identify timeframes for critical phases and key activities and develop a risk management framework.”

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Acting IRS Chief Pledges Repairs before Congressional Panel

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Acting Internal Revenue Service Commissioner Danny Werfel told lawmakers he is working to restore trust in the beleaguered U.S. tax agency and said more funding isn’t necessarily the answer.

If you start with more money, it’s the wrong starting point,” he told lawmakers at a House hearing today, his first appearance before Congress since President Barack Obama appointed him to the post on May 22.

Obama’s budget for fiscal year 2014 seeks a $1 billion, or 9 percent, increase in the IRS budget. Werfel said while he supports the budget proposal he wants improvements to occur before pushing for more money for the tax-exempt division.

The controversies involving the IRS are occurring as the agency is charged with helping to administer Obama’s signature 2010 health care law and police offshore tax avoidance. Werfel’s job is to start fixing damage caused by the revelation that the IRS applied tougher scrutiny to small-government groups applying for tax-exempt status.

“The agency stands ready to confront the problems that occurred, hold accountable those who acted inappropriately, be open about what happened and permanently fix these problems so that such missteps do not occur again,” Werfel told a House Appropriations subcommittee.

Parody Videos
Lawmakers of both parties criticized the treatment of tax-exempt groups and an inspector general’s report about spending on IRS conferences, which will be released tomorrow and is expected to focus on a 2010 conference in California that included parody videos and expensive hotel suites.

J. Russell George, the Treasury Inspector General for Tax Administration, said a whistle-blower within the IRS alerted his office to the conference spending.

“It seems we have a new misstep every day at the IRS,” said Representative Hal Rogers, a Kentucky Republican and chairman of the full appropriations committee. “I’m very troubled at what may come to light next.”

Rogers said Congress may further restrict the IRS’s funding with fresh constraints.

Six congressional committees have opened inquiries and the Justice Department is pursuing a criminal probe.

Tougher Scrutiny
George said he has been unable to determine who first came up with the idea of giving Tea Party and “patriot” groups tougher scrutiny based solely on their names.

“I’m frustrated too,” Werfel said. “I want these facts to emerge quickly.”

Werfel said he plans to produce a report by the end of the month detailing his progress. He has replaced several top managers at the agency.

Rogers questioned thousands of dollars of bonuses paid to IRS managers, including Lois Lerner, the director of exempt organizations, who is on paid leave.

George, the inspector general, said he is conducting an audit of IRS bonuses that is expected to be released this year.

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Tea Party Groups File Lawsuits against IRS

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An advocacy group has filed a lawsuit in a Washington, D.C., federal court on behalf of 25 Tea Party and conservative organizations against the Internal Revenue Service and top IRS officials, in addition to the U.S. Attorney General and Treasury Secretary, arguing that the Obama administration overstepped its authority in subjecting applications for tax-exempt status from Tea Party groups to extra scrutiny.

The lawsuit, from the American Center for Law and Justice, urges the court to find that the Obama administration violated the First and Fifth Amendments of the U.S. Constitution, the Administrative Procedure Act, along with the IRS’s own rules and regulations. The lawsuit requests a declaratory judgment that the defendants unlawfully delayed and obstructed the organizations’ applications for a determination of tax-exempt status by means of conduct that was based on unconstitutional criteria and impermissibly disparate treatment of the groups. The suit also seeks injunctive relief to protect its clients—and their officers and directors—from further IRS abuse or retaliation. Further, the lawsuit seeks compensatory and punitive monetary damages to be determined at trial at a later date.

The IRS has come under fire in the past month after the former director of its Exempt Organizations division revealed that it had screened applications for tax-exempt status by filtering them out using terms like “Tea Party” and “patriot” to group them together. The disclosure came just days before the release of a critical report from the Treasury Inspector General for Tax Administration after several years of questioning from lawmakers in Congress who had written to the IRS asking about delays in applications for 501(c)4 tax exemptions .

 

The director, Lois Lerner, pleaded the Fifth Amendment when she was called before Congress and has been put on administrative leave (see IRS Exempt Organization Director Lois Lerner Replaced on an Acting Basis). Former acting commissioner Steven T. Miller has also been pressured to step down and has been replaced by Daniel Werfel from the Office of Management and Budget (see Werfel Has a Month for ‘Thorough Review’ at IRS).

“The IRS and the federal government are not going to get away with this unlawful targeting of conservative groups,” said ACLJ chief counsel Jay Sekulow in a statement. “As this unconstitutional scheme continues even today, the only way to stop this flagrant and arrogant abuse of our clients’ rights is to file a federal lawsuit, which we have done. The lawsuit sends a very powerful message to the IRS and the Obama administration—including the White House: Americans are not going to be bullied and intimidated by our government. They will not be subjected to unconstitutional treatment and unlawfully singled out and punished because of their ideological beliefs. Those responsible for this unprecedented intimidation ploy must be held accountable.”

In the lawsuit, the ACLJ cites six counts arguing the federal government violated the Constitution, federal law, and even its own rules and regulations.

The suit contends that the Obama Administration “unlawfully delayed and thereby effectively denied approval of Plaintiffs’ applications for tax exempt status by means of a comprehensive, pervasive, invidious and organized scheme that purposefully established unnecessary and burdensome inquiries and scrutiny of Plaintiffs’ applications based solely upon Plaintiffs’ political viewpoints (or Defendants’ assumption of Plaintiffs’ viewpoints, based on their organizational names).”

Further, the complaint asserts that the federal government’s “unlawful conduct included but was not limited to excessive scrutiny of Plaintiffs’ applications by requiring donor names, listing of issues important to Plaintiffs’ organizations, including their positions on such issues, the contents of communications between the organizations and legislative bodies, the applicants’ criteria for membership, volunteer names and the political affiliations of persons associated with the organizations . . .”

The ACLJ said Wednesday it is representing a total of 25 organizations in the lawsuit, with additional groups likely to be added to the suit as it progresses. The names of the organizations represented are available here. Of the 25 groups, 13 organizations received tax-exempt status after lengthy delays, 10 are still pending, and two withdrew applications because of frustration with the IRS process.

The ACLJ lists as defendants in the case: U.S. Attorney General Eric Holder; the Internal Revenue Service; Treasury Secretary Jacob Lew; Steven Miller, former acting commissioner of the IRS; Lois Lerner, director of Exempt Organizations Division for the IRS; Holly Paz, director, Office of Rulings and Agreements; and unknown named officials inside the IRS.

The ACLJ noted that the IRS contends that the targeting scheme originated with a couple of rogue IRS agents out of the Cincinnati, Ohio office and contends the abusive conduct has been halted. However, the ACLJ said it has correspondence showing this tactic was used not only in the Cincinnati office, but also from two offices in California—El Monte and Laguna Niguel—as well as the national office in Washington, D.C. It said the Washington office sent a letter to one of its clients as recently as one month ago.

Furthermore, the ACLJ said it has letters signed by Lerner suggesting her personal involvement in sending invasive questionnaires to 15 of our clients in March 2012 nine months after she was told about the scheme and promised to stop it.

CREW Lawsuit
The IRS has also been facing lawsuits from the other side of the political divide, with the advocacy group Citizens for Responsibility and Ethics in Washington filing multiple lawsuits encouraging the agency to crack down on political groups seeking tax-exempt status. CREW filed another lawsuit last week against the IRS in the same D.C. federal district court where the ACLJ filed its lawsuit. CREW’s suit aims to compel the agency to initiate a rulemaking procedure to address conflicts between the Tax Code’s requirements for Section 501(c)(4) groups and implementing IRS regulations.  Current IRS regulations grant tax-exempt status under section 501(c)(4) of the Tax Code to groups “primarily engaged” in promoting social welfare.  The tax laws, however, require such groups to be “operated exclusively” for social welfare purposes.

“As the ongoing IRS scandal shows, the 501(c)(4) regulation is unmanageable,” said CREW executive director Melanie Sloan in a statement. “It clearly conflicts with the Tax Code, and IRS employees are simply at a loss as to how to apply it.  Remarkably, the IRS has known the regulation presents enforcement issues for more than 50 years, but has failed to act.  CREW has sued to force the IRS to finally deal with this issue.”

CREW pointed out that groups seeking or claiming 501(c)(4) status have interpreted the IRS regulation to mean they can spend up to 49 percent of their annual expenditures on electoral activities, while still maintaining tax-exempt status. During the 2012 election cycle, Section 501(c)(4) groups spent nearly $255 million on elections. In April, following up on its earlier lawsuit against the IRS, CREW filed a rulemaking petition with the agency seeking a revision to this regulation to eliminate the glaring loophole that allows these tax-exempt groups to engage in substantial political activity while keeping the identities of their donors secret.

The discrepancy between the “operated exclusively” standard of the law and the “primarily engaged” language of the regulations has been controversial within the IRS ever since the regulations were enacted in 1959.  The IRS revisited the problem multiple times in the 1960s and 1970s, but did nothing.  Additionally, since 2011, at least two rulemaking petitions seeking to correct the problem have been filed, with the IRS responding merely that it is “aware” of the issue.

“Until now, it has been impossible to persuade the IRS or Congress to confront this issue,” said Sloan. “But now that the entire country has been educated about this previously obscure tax matter, this lawsuit may finally spur reform. The current IRS scandal directly stems from the problematic regulation. Only by changing it can we be sure we won’t see a repeat of the current debacle.”

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Wealthy Increasingly Concerned about Health Costs

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Family health and the costs of long-term care and financial support for extended family have emerged as major concerns for high net worth investors and their families, with family health perceived as the biggest risk to family wealth, according to a new survey.

The survey, by U.S. Trust, polled 711 high net worth adults in the U.S. with more than $3 million in investable assets. It found that 47 percent of the respondents have created a financial plan to address long-term care needs that they and their spouse or partner might need, but only 18 percent have a financial plan that accounts for parents’ long-term care costs.

Only one-quarter (27 percent) of baby boomers and 16 percent of those who are over age 68 say they ever expected their parents might turn to them for financial assistance. Yet, one-third of Generation X and nearly half (46 percent) of Generation Y expect their parents or in-laws to rely on them for financial assistance at some point in their lives.

Sixty-three percent of wealthy people feel responsible for financially supporting their parents or in-laws if needed, even if it jeopardizes their own financial security, and 55 percent feel a responsibility to provide financial assistance for less financially fortunate siblings if they were to need it. Fifty-six percent of wealthy parents say they provide financial support to their adult children.

Nearly half (46 percent) of respondents have provided substantial financial support (not a loan) to adult family members other than their own spouse or partner. Two-thirds (69 percent) do not have a financial plan that accounts for the financial needs of any of these other adult family members.

The study found that the wealthy have a heightened sense of financial security and have shifted their investment priorities from asset protection to asset growth. Yet their well-documented aversion to risk still prevails. Lower risk trumps the pursuit of higher returns as a priority in managing their wealth. Despite this, investment risk is one of three broad areas, including family wealth and retirement planning, where U.S. Trust found a disconnect between goals and proactive wealth planning.

“The majority of people we surveyed grew up in middle-class families and created their own wealth,” said U.S. Trust president Keith Banks in a statement. “They don’t see themselves as wealthy, and many are unaware of risks and circumstances that grow increasingly complex as wealth accumulates. The wealthy have been disciplined about protecting their assets from market loss, but may have a false sense of financial security. They are not adequately planning for family health concerns or for the retirement that they want. We need to shift the conversation about wealth management to these important topics and expand their understanding of risk.”

Eighty-eight percent of people surveyed say they feel financially secure right now, and 48 percent feel even more financially secure today than they did five years ago. Those who don’t feel confident about their future financial security are more likely to be women, members of Generation X (adults aged 33 to 48) and households on the highest tier of the high net worth segment, all of whom share a primary concern about income in retirement.

Six in 10 (60 percent) high net worth investors say asset growth is a higher priority than asset preservation, a reversal of goals from a year ago when nearly six in 10 (58 percent) said that asset protection was more important. Yet, nearly two-thirds (63 percent) still say that reducing risk and achieving a lower rate of return is more important than pursuing higher returns by increasing risk.

A little over half (56 percent) of high net worth investors have a large amount of funds still sitting in cash accounts. Only 12 percent are content leaving their cash on the sidelines, yet few (16 percent) have immediate plans to move it. Two in five plan to gradually invest cash holdings over the next two years, and 35 percent have no plans to invest it.

Fifty-seven percent of respondents said that pursuing higher returns regardless of the tax impact is a higher priority than minimizing taxes. Only 34 percent feel very well-informed about the impact of recent tax law changes on the total return of their investment portfolio.

Only 37 percent of respondents, including 42 percent of men and 30 percent of women, feel very well-informed about how the tax law changes affect their income. And two in three respondents do not feel well-informed about strategies available to them to help minimize the impact of taxes on income, investments or their estate. Nearly seven in 10 (69 percent) of high net worth investors aren’t changing investment strategy in order to minimize taxes.

The majority of wealthy investors (86 percent) agreed that a long-term buy-and-hold approach still is the best growth strategy, with 35 percent strongly agreeing with this.

Sixty-two percent of high net worth households, including 52 percent of those still working, said they are very confident they will have sufficient income in retirement, in contrast to the rest of the U.S. population.

Six in 10 non-retirees have been calculating their retirement income by reviewing expected distributions from retirement savings accounts. Yet a large number have not adequately accounted for the impact of inflation (47 percent), taxes on their investment income (52 percent), life expectancy (56 percent), the cost of long-term care (62 percent), or any financial support that might be needed by their children (80 percent) or parents (82 percent).

Three-quarters of respondents have not adequately factored into their retirement planning any increase or decrease in real estate values. Yet 23 percent of retirees and 52 percent of non-retirees (including 39 percent of baby boomers) say primary residential real estate is important to funding their retirement.

Only one in three high net worth adults under the age of 49 envisions working beyond age 65. Meanwhile, six in 10 baby boomers, many already of retirement age, now have plans to work beyond age 65.

Once retired from their current occupation, 11 percent of respondents say they are likely to continue working full-time in a new endeavor and 41 percent expect to continue working on a part-time basis. More than half (54 percent) of the wealthy would like to spend time volunteering.

The report, “Insights on Wealth and Worth,” found that the transfer of wealth and values is important in high net worth households, and that attitudes and behaviors about money, work and charitable giving begin to take shape early in life within the home. This year’s survey found that generational gaps in attitudes about leaving an inheritance have narrowed and that work ethic and the transfer of financial skills and knowledge have the greatest influence on the next generation.

Only one-quarter of all survey respondents attribute the majority of their wealth to an inheritance. Those who have inherited wealth are more likely to want to leave an inheritance themselves. Seventy-seven percent of people who inherited the majority of their wealth, and 63 percent of those who earned it, consider it an important goal to leave a financial inheritance to the next generation.

Two in three Baby Boomers do not expect to receive an inheritance; 57 percent of adults under the age of 32 do expect an inheritance. Sixty-four percent of Baby Boomers, compared to 78 percent of adults younger than age 32 and 72 percent of those over age 68, think it’s important to leave an inheritance.

Only two in five wealthy parents (42 percent) agree strongly that their children are/will be well-prepared to handle their inheritance. Few wealthy parents believe their children will be mature enough to handle their wealth before the age of 25. Just 39 percent of parents whose children already are age 25 or older have fully disclosed their wealth to children, while 53 percent have disclosed just a little and 8 percent have disclosed nothing at all. The two most common reasons for not disclosing wealth to children are (1) overall aversion to the topic, having been taught never to discuss wealth with anyone; and (2) parents’ concern that disclosing information about family wealth will negatively affect their children’s work ethic.

Eighty-eight percent of parents agreed that their children would benefit from discussions with a financial professional. One in three (31 percent) respondents received formal financial training themselves from a professional advisor. Yet only 16 percent of parents have provided, or have plans to provide, their children with access to formal financial skills training.

Two-thirds of wealthy parents say they would rather have their children grow up to be charitable than to be wealthy.

Eighty-nine percent of wealthy parents believe their children appreciate the value of a dollar and the privileges of growing up in a family with good fortune. However, half of parents (51 percent), particularly those with young children, think their children feel entitled to a lifestyle that was worked hard for, and 47 percent worry that, by growing up without knowing what it’s like to go without, their children may not attain the same level of success. When it comes to estate planning, U.S. Trust found that, while the basics, such as a written will, are in place, comprehensive planning is incomplete. Survey respondents cited the top three goals of estate planning as (1) ensuring the needs of a spouse are met; (2) minimizing estate taxes; and (3) minimizing the administrative burden of settling one’s estate.

Despite awareness of the importance of estate planning, the survey found that nearly three-quarters (72 percent) of respondents do not have a comprehensive estate plan, including 84 percent of those under the age of 49, and 65 percent age 49 or older.

Approximately one-half (55 percent) have never established a trust of any kind, primarily for two reasons: procrastination and the mistaken notion that outlining wishes in one’s will precludes the need for a trust.

Six in 10 respondents have named, or intend to name, their spouse or partner as executor of their estate. Only 32 percent of people consider the financial knowledge and skills of the person they name as their executor. Having sufficient legal and financial knowledge was cited as the top difficulty in serving as an executor by those who already have served, particularly by women.

Two-thirds (67 percent) of respondents say they have organized their personal, financial, medical and legal records and information in one place, but nearly half (46 percent) have not informed the executor of their estate about how to access the records. Fifty-five percent of respondents say they have organized passwords for accessing digital records or accounts, but 63 percent have not specified their wishes authorizing access to the passwords or to any online assets.

The survey found a desire to use wealth in a way that reflects personal goals, passions and tangible assets. In addition to leaving too much cash on the sidelines, the survey also found a limited understanding of innovative, risk-based approaches to portfolio construction and insufficient planning to protect some of these non-financial assets.

Sixty-five percent of wealthy households surveyed own investments in some type of tangible asset, ranging from real estate to oil and gas properties to farmland, a trend particularly evident among younger investors. One-third (35 percent) of investors under the age of 32 say that tangible investments are important to their overall wealth strategy given the current tax, political and economic environment.

Six in 10 wealthy individuals feel that they can have some influence on society by how they invest, and 45 percent agree that it’s a way to express their social, political and environmental values. Nearly half (46 percent) of respondents feel so strongly about the impact of their investment decisions that they would be willing to accept a lower return from investments in companies that have a greater positive impact. Forty-four percent would be willing to take on higher risk.

One-half (51 percent) of those surveyed, including 65 percent of women and 67 percent of investors under age 49, think it is important to consider the impact of investment decisions on society and the environment. Yet only one in four investors has reviewed their investment portfolio to evaluate its impact on these concerns.

Six in 10 (59 percent) high net worth individuals dedicate a portion of their wealth to the collection of valuable assets such as such as fine art, watches and jewelry, antiques, fine wines and rare coins and books or classic and high-performance cars. The majority say they collect primarily for enjoyment and the intrinsic value of the collection, versus expecting a return, which may explain why so few have taken steps to protect their collections as they might other financial assets. Only about half of those with collections have insurance. Only 19 percent of collectors have discussed or outlined their wishes for the collection with future heirs.

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IRS Hearings Express Lawmakers’ Outrage

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The first round of congressional hearings on the Internal Revenue Service’s scrutiny of small-government groups didn’t reveal the people who started that practice or provide clearer answers on why they did it.

So far, the intense questioning and outrage by lawmakers on three separate committees directed at the IRS hasn’t shown who decided to give extra attention to “Tea Party” and “patriot” groups applying for tax-exempt status based on their names. It hasn’t explained why the agency kept using what an inspector general called “inappropriate” criteria even after IRS officials tried to stop it in 2011.

“What people want to know is who is going to be held accountable and how they’re going to be held accountable,” said Representative Scott DesJarlais, a Tennessee Republican.

Even as the White House has changed its timeline about who was informed in 2013, lawmakers also haven’t proven that anyone outside the IRS knew of the practice until after the 2012 election.

Former IRS Commissioner Douglas Shulman testified under oath again yesterday that he kept the information inside the agency, and Deputy Treasury Secretary Neal Wolin said he didn’t know any of the details until May 10, 2013.

Lawmakers asked for the names of low-level employees and received none. They sought explanations for the IRS actions and got mostly generalities.

At least six separate inquiries continue: four from congressional committees, a Justice Department criminal probe and further review by the inspector general who oversees the IRS that could result in referrals to prosecutors. Steven Miller, the acting IRS commissioner, lost his job, and Joseph Grant, who oversaw tax-exempt groups, is retiring early.

Lawmakers’ Frustration
At two House hearings and one in the Senate, lawmakers expressed frustration with the lack of clarity from senior IRS officials, including Shulman. They criticized the agency’s breach of trust and pledged to keep investigating.

“You’re really good at certain parts of detail and you obscure the rest,” Republican Representative Paul Gosar of Arizona told Shulman, who left the IRS in November 2012.

One IRS employee who could have provided more detail—Lois Lerner, who oversees tax-exempt organizations—refused to testify to the House Oversight and Government Reform Committee.

Lerner, accused of making false statements to Congress, cited her constitutional right not to incriminate herself after insisting that she had done nothing wrong and committed no crimes.

“She’s at the heart of the storm,” said Representative Jim Jordan, an Ohio Republican. “You would have liked for her to answer our questions.”

Constitutional Rights
Committee Chairman Darrell Issa, a California Republican, said he may recall Lerner to testify and suggested that by giving a statement, she may have waived her constitutional rights. Some criminal-procedure experts questioned whether Lerner said enough to give up her right against self-incrimination.

Lerner’s opening statement was “puffing,” said Washington criminal defense attorney Stanley Brand, who was House general counsel from 1976 to 1983. “She’s not answering questions, and she’s not giving an account of what happened. She’s saying, ‘I’m innocent.’”

As a practical matter, congressional Republicans can test Lerner’s assertion only by holding her in contempt and referring her case to the Justice Department for prosecution—a process that could take two years, Brand said.

Lawmakers could call Lerner to testify again and require her to answer questions that aren’t incriminating, said Gabriel Chin, who teaches criminal procedure at the University of California Davis School of Law. Still, he said, “If it gets anywhere near the issue, she’s allowed not to say.”

Consistent Procedures
The IRS has insisted that lower-level employees in the agency’s Cincinnati office, which handles applications for tax-exempt status, came up with the idea of using “Tea Party” as a shorthand for a batch of cases that raised concerns of impermissible political activity. The IRS maintains that it was trying to apply consistent procedures to similar cases and not trying to target groups based on their views.

So-called social welfare groups organized under section 501(c)(4) of the tax code can engage in politics as long as it’s not their primary purpose. Hundreds of groups had their applications delayed because of the extra scrutiny, and some received extensive questionnaires that asked for lists of donors. Social welfare groups don’t have to disclose donors.

“We have had some difficulty in terms of getting clarity from some of the employees we’ve interviewed,” J. Russell George, the inspector general who issued a May 14 report on the issue, said at yesterday’s hearing.

Representative James Lankford, an Oklahoma Republican, said more than a few employees had come up with the questions.

“This is a pretty large list of people that are involved in creating this,” he said. “Someone knew. In fact a lot of someones knew.”

Lawmakers from both parties criticized George’s process, particularly allowing managers to sit in during interviews of lower-level employees.

Screening Group
The House oversight committee yesterday released internal IRS e-mails that back up part of the IRS’s story while leaving some questions unanswered.

In one e-mail on June 2, 2011, Cindy Thomas of the tax-exempt division wrote to Holly Paz, who supervised legal guidance on issues involving the groups.

Thomas described the screening criteria, which captured “Tea Party” groups, as something the “screening group came up with based on cases they were seeing” as applications came in.

“If we don’t want the screening group to include all of these type issues as ‘tea party cases,’ they would have no problem including or excluding certain cases,” Thomas wrote in a plea for a consistent rule. “What I am trying to say is that it doesn’t matter what the cases are called or how they are grouped.”

The chain of e-mails occurred before a June 29, 2011, meeting at which Lerner ordered that the use of “Tea Party” as a screening criterion be stopped.

It bolsters the point in the inspector general’s report that ineffective management and training left employees in Cincinnati without adequate rules.

Written Answers
The committee also released written answers to questions that Lerner submitted to the inspector general. A key section—on the origin of the employees’ interest in political cases—is blacked out.
In her written statement, Lerner said after the June meeting, employees changed the criteria again, “unbeknownst to me,” to include groups “educating on the Constitution and Bill of Rights.” She made them change it again, according to her statement.

Staff members from the oversight panel, the Senate Finance Committee, the House Ways and Means Committee and a Senate investigative subcommittee are pursuing the issue. Oversight staffers interviewed Paz this week and are seeking to speak with four other IRS employees.

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