Biden’s IRS is using scare taxes to discourage legitimate tax strategies

The IRS continues to issue press releases with cherry-picked or misleading data that cast long shadows of doubt over completely legitimate tax minimization strategies. Why would the IRS keep doing that? 

The agency’s intent seems clear: to intimidate taxpayers — particularly high-income taxpayers — into paying more taxes than they need to. Don’t take legitimate steps to minimize your taxes, because you’ll arouse our suspicion and we’ll come after you. And we’re going to tell you how dirty these completely above-board tax minimization strategies are…because we’re the IRS and we don’t like them. 

It’s a dirty way to play the tax enforcement game, but it fits a pattern the IRS has exhibited and which has become more pronounced under the Biden Administration. 

Taxpayers — and given the increasing politicization of the agency’s public pronouncements, high-income taxpayers in particular — need to understand what the IRS is doing in its communication strategy and why. 

The stream of IRS press releases is increasingly reminiscent of one of those old “It’d be a shame if something happened to it” protection racket movie scenes. And the “it,” in this case, is the taxpayer’s bank account.

The IRS is the most intimidating of all federal bureaucracies, and unfortunately the one that taxpayers come into contact with the most. It has the power to demand that citizens produce confidential business and personal financial records. It can impose fines and seize assets. It can shut businesses down. It can prosecute taxpayers in federal court.

It is, in short, an extraordinarily powerful agency with dangerous capabilities that can severely affect your life. You’d think that would merit a very high baron the agency in its enforcement actions, but you would be wrong.

In practice, the agency has become increasingly ideological and specifically hostile to the interests of wealthy taxpayers. In recent press releases, the IRS has implied that high income Americans are not “paying their fair share” and openly called legal tax minimization strategies “scams and schemes.”

A 1996 IRS Bulletin stated the “Mission of the Service” this way: “The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness.”

That was then and this is now. Today the IRS’s “News” page on the website casts aspersions on America’s wealthy citizens and successful companies while carrying separate press releases about clean hydrogen fuel tax credits, home energy efficiency tax credits, sustainable aviation fuel tax credits, and medals won by IRS employees during Public Service Recognition Week. 

It’s not a leap to see that politics are taking precedence here over taxpayer education. And this leads to the series of new press releases the IRS calls its “Dirty Dozen.” The agency says that these are “a variety of common scams that taxpayers may encounter.” 

But in fact, this is essentially a way to plant seeds of doubt in a taxpayer’s mind about the legitimacy of certain perfectly legal tax minimization strategies.

The “Dirty Dozen” releases highlight some obvious tax-related frauds: phishing attacks, fake charities, phony tax preparers trying to steal your personal information. 

But then the “Dirty Dozen” shifts to include completely legitimate tax minimization strategies. These include strategies involving captive insurance companies for business, art donations, charitable remainder annuity trusts, syndicated conservation easements, and more.

In short, the IRS hates tax minimization strategies, unless they involve alternative energy, in which case they are even promoted on the website.

But when the IRS finds a strategy it particularly dislikes, it pulls out the most egregious abuses of the strategy that it can, forces that specific taxpayer into court (rather than allowing for settlement), and makes an example of the abuses.

Then, having crucified a few egregious offenders, the IRS likes to issue a wave of releases implying that all uses of the strategy in question are illegitimate and therefore members of “The Dirty Dozen.” The implication for taxpayers? Don’t you dare take an aggressive stance against us here at the IRS, because we’ll come after you. 

Is that persuasion? Intimidation? Propaganda? Or just innocent taxpayer education? 

Before you draw a conclusion, consider that the Biden Administration has a clear burr under its saddle for individuals making more than $400,000 a year. It has recently proposed new tax rates for them, and its IRS has openly targeted them for increased scrutiny in previous edicts. 

Even so, the income threshold appears not to matter. A a recent study showed that 63 percent of new audits occurred with taxpayers making less than $200,000. Hold onto your wallets.

If you don’t think the agency is acting like the growling lap dog of the Biden administration, go to IRS.gov site. Search for terms like “fair share,” “tax avoidance schemes,” and “wealthy taxpayers.” You’ll see literally hundreds of hits. This is interesting, because all of those terms have a strong element of non-factual judgment. They are relative terms rather than legislative or numerical ones.

How much is your “fair share?” When are perfectly legal and completely legitimate tax minimization strategies transformed into “tax avoidance schemes?” And what is the definition of a “wealthy taxpayer” in these inflationary and highly uncertain times?

Who gets to make those judgments? And perhaps more critically, if the polls are right and we are about to elect an administration with a radically different political agenda, do we as Americans want this most powerful of all agencies to simply be repurposed and retargeted to pursue the next administration’s political agenda rather than this one?

My general suggestion for high net-worth taxpayers is to be on your toes with a healthy sense of aggressive skepticism when it comes to anything the IRS says. They are no longer the agency you remember, which merely tried to efficiently and fairly collect taxes owed. 

If you’re considering a tax minimization strategy, have an in-depth, heartfelt conversation with your trusted advisors to make sure it is 100 percent legitimate, that you fully understand it, that you’re documenting it thoroughly and completely, and that you have incorporated any risk of audit that it might create. Audits aren’t fun, but when you have the right team of advisors, they’re nothing to fear. They’re a simple reality of doing business, and you respond to them with the right experts and advocates at your side.

Once you have vetted strategies and made the choice to employ one, don’t let the IRS website, the testimony of its director before Congress, or any other kind of press release or public pronouncement influence you unless you hear differently from your tax advisors. 

If you’re sufficiently risk-averse or sufficiently wealthy that overpaying federal taxes is immaterial to your family, ignore the above advice. Otherwise, realize that the IRS’s job isn’t to look out for you, and under the current administration, it most certainly will not do so. 

Bruce Willey is the founder of American Tax and Business Planning LLC.