Sunday, July 23, 2006

IRS TO SIGNIFICANTLY REDUCE TRANSFER TAX AUDIT STAFF

The IRS intends to eliminate the jobs of almost half of the lawyers who audit gift and estate taxes. The IRS presently has 345 estate tax lawyers. The jobs of 157 of them will be cut in less than 70 days.

Kevin Brown, an IRS Deputy Commissioner, indicated that the staff cuts are occurring because far fewer people are now subject to estate taxes under the legislation enacted a few years ago than was previously the case. Others however, believe that the cuts are an attempt to effect estate tax repeal through the back door - that is, to significantly reduce audit activity on wealthy Americans.

Whether the staff cuts will have any impact on transfer tax enforcement depends on which side you believe. If there has been a significant reduction in audit activity due to the estate tax changes, then perhaps the staff cuts will not have much of an impact on enforcement. However, if audit activity has not been substantially reduced by reason of the tax cuts, then one would expect the staff cuts to hamstring the IRS in its enforcement efforts. Of course, even if less returns are being filed, the IRS could still retain the audit personnel and then simply conduct more audits on a percentage basis of all returns filed. However, Brown indicated that the incremental benefit of auditing more estate tax returns would not produce enough revenue to be worth the cost.
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