Federal Estate and Gift Taxes: Code and Regulations - Essay Example

? Assignment 4: E Tax IRS’s current level of interest and audits in e tax and need for tax planning IRS or the Internal Revenue Service is an agency or bureau that functions under the US federal government. The Internal Revenue service is controlled by the direction of the Commissioner of Interval Revenue. The responsibility of IRS includes collection of taxes in US and enforcing the Internal Revenue Code that is framed by the US federal government. Currently IRS has divided its interest and audit functions under four divisions, namely the Large and International Business, the Small Business and Self-employed, Wages and Investment division and the Government organizations (exempted from tax). Looking at the figure of 2010 fiscal, the estate tax returns amounted to 0.02% of the total tax return with huge losses in tax revenue. Currently, IRS has modernized tax collection methods and has three computerized tax collection centers apart from ten other tax collection centers. The centers receive returns over mail and compile the returns at their end. The current level of interest and audit has tightened like ever before. IRS is reconsidering the method of valuation of estate tax for wealthy individuals. In the process, the agency has also discarded some of its favorite methods of tax valuation. IRS is currently more concerned about the family limited partnerships and their tax-saving structure. Tough auditing by IRS has been recommended on the face of US Congress’ past failure to implement federal estate tax. The federal estate tax is back in vogue with higher tax rates of 55% for estates of 1 million dollars worth or more as compared to 45% tax on $3.5 million or more wealthy estates. As a result of increased focus on estate tax, IRS recommend on an average of $363149 million tax to estates after conducting due audit. This is increased earnings for the federal government as a husband and wife were not subject to estate tax with less than $7 million value of their estate. Increased interest and audit of estate tax by IRS has resulted in increase of returns by 50% over the last decade. The aggressive collection of tax by the IRS has raised concern for comparatively lesser wealthy estates that were exempt from estate tax in the earlier phase. Both the increase in rate of tax as well as limits for exemption has raised concern for tax planning in order to restore more wealth in their estates (Cch Tax Law Editors, 2008, p.744). Viability assessment: proposed changes to legislation related to estate taxes The proposed changes to the legislation of estate tax include portability of a deceased spouse’s unused estate and gift tax exclusion amount. The proposed change in legislation of estate tax is deemed to be viable as this would simply tax collection for IRS and would also benefit the taxpayers. Another proposal talks about the case of death of one of the partners and if another partner or spouse wants to opt out of estate tax and intends to carryover the estate tax to the assets of the estate. This proposal was not supported by the legislative members. Another proposed change is whether a transfer of irrevocable property from one estate to another is treated as a gift. The viability of the change in this legislation should be assessed by taking into account the change in the interests and objectives of the estate. Transfer of assets of the estate trust in case of death of a spouse to its grantor trust is another proposed change in legislation of estate tax. This would, however, affect the benefits of transfer that could be done by the couple to their children (Hunt and Hunt, 2004, p.12). Impact of estate tax on wealth of taxpayer: Tax planning tools The ways to avoid trouble in tax valuation is to get good appraisals and keeping clear documentation. In the earlier stages auditors of the IRS were not rewarded and several occasions of mathematical errors to mis-valuation of assets resulted in decline of overall estate tax by around 65%. This eventually raised concern in the federal government in the wake of financial crisis and IRS implemented tight measures of estate tax collection. New tax laws were enforced by the Congress with higher rates (55%) than before (45%) for estates. The estates with worth of greater or equal to $1 million were covered under the revised tax rate. Thus the estate tax has been distributed among all the estates with considerable wealth. Also the estates with higher wealth ended with paying up more taxes than ever before. So, the estate of the husband and wife would end up paying more taxes under the current system of estate tax. Thus, in order to retain more wealth and transfer the wealth to their children, the family would need to adopt tax planning tools. Keeping in mind the audit of their estates by IRS, it can be recommended to the clients about the following provisions of tax planning. The client may plan to include federal gift tax exemption for the total amount of taxable gifts that the client would earn in their lifetime. The clients must plan to avail the total exemptions in the categories of Federal Gift Tax and the Federal Estate Tax in order to support their tax planning measures and thereby manage tax pay of estate tax. The tax laws would also allow the couple in tax planning by transferring and adding the exclusion amount to his or her tax exclusion amount in case of death of one of the spouse. This may again be transferred to their children as cumulative exemptions in case of transfer of wealth. The 2012 Taxpayer relief act would allow the couple to get permanent exemptions on the large amount of Federal Estate Tax emption. Also the current environment of lower interest rates, appropriate discounting and valuation of trust funds and assets will help the couple to restore maximum wealth through tax planning. Strategy to your client to mitigate or eliminate estate taxes In the context of estate tax, the couple client may maximize their wealth and transfer the same to their children by adopting strategies to mitigate the estate tax. More reduction of estate tax would help the couple the couple to increase the retention of the wealth of their estate. The following suggestions may be given to the couple. The couple may opt for generation skipping in optimal proportions. This means the couple may transfer maximum value of the assets to their children and the surplus to their grandchildren. Thus transferring a part of the assets directly to the third generation is able to avoid the taxation on both occasions and instead is taxed once thereby saving tax. Since, the couple runs more than one business; it would hard to determine the exact fair market value of the assets. Thus by discounting the assets to their present value may result in mitigating the valuation of assets and eventually the amount of tax. Estate tax provisions that elevate the potential risk of an IRS audit US tax laws empowers the IRS to enforce liens or cease assets thereby raising the risk of the taxpayers in case the assessment of the wealth of their estates do not determine appropriate valuations considering the market value and its surrounding issues. The risk may arise due to inefficient appraisal of tax which may pose investigation and questions to the attorneys of the estate by the IRS auditors. If a gift tax return included is not reflecting sufficient disclosure in support, then it may be subject to risk from audit perspective and may be questioned. Allocation of incorrect tax amounts in their returns may also be subject to risk for the taxpayer if spotted by the auditors. Also errors in reporting jointly held property by the couple, undervaluation of assets, and absence of supporting explanation are subject to audit and questions by the auditors. The annual exemption of gifts is subject to change every year. This information should be up to date while filing returns as any discrepancy is subject to risk for the tax payers (Gale, Hines and Slemrod, 2001, p.4). Suggestions: simplification of estate tax code for both taxpayers and the federal treasury Simplification of estate tax code would result in aligning the economic activities of the taxpayer with their personal activities. This would not only reduce the cost of compliance, enforcement of code by the federal treasury and lesser administrative cost but also provide the estate tax prayer in filing simplified tax returns. One way of simplifying the tax code would be reduce numerous provisions of the estate tax and decide on abolishing the entire temporary tax provisions. Also consolidating numerous provisions without losing on the estate tax is an ideal way to make the tax code simpler. Another suggestion is keeping track of the phase-out of a range of taxes in different phases of income of the estate. This would help the treasury to reduce their loss and benefit the taxpayer in avoiding the risk of audit. The tax code can be simplified by reforming the individual alternate minimum tax by excluding the middle-income tax payers which were never the target of estate tax code. Reference Cch Tax Law Editors. 2008. Federal Estate & Gift Taxes: Code & Regulations (Including Related Income Tax Provisions), As of March 2008. USA: CCH. Hunt, L. R. and Hunt, L. R. 2004. Lawyer's Guide to Estate Planning: Fundamentals for the Legal Practitioner. USA: American Bar Association. Gale, W. G., Hines, J. R. Jr. and Slemrod, J. 2001. Rethinking Estate and Gift Taxation. USA: Brookings Institution Press. Read More