Right now, the key for filers is to make sure their tax return tells a consistent story, he said. If that story changes — say, when a lawyer becomes an equity partner in a law firm and gets different tax documents — then the filer needs to be ready to provide supporting documents to back up the new tax story.
“Changes are going to trigger scrutiny,” he said. “And when there’s a change in the filing profile, that creates risk.”
Regardless of what was done in the past, some practices are going to need to change. As a start, one set of advisers to a wealthy family is going to need to communicate better with the other accountants, lawyers and financial advisers working with the family.
In the area of valuation discounts, this is particularly true. It’s common and legal for people who own privately held family businesses to reduce the business’s value when they transfer some part of it to a trust or an heir. This is allowed because it would be hard to sell that stake at its full value to someone outside the family. An accepted discount is 30 percent.
But that provision has been abused. While an argument can be made for a 30 percent discount on a manufacturing company, should a portfolio of marketable securities held in a family partnership get the same discount?
“People have used the same discount for years, but now you’re going to see variations on the discounts depending on the assets,” said J. Christopher Cooke, a certified public accountant and lawyer at the Cooke Financial Group. “If I put together a family limited partnership with a 30 percent or 40 percent discount in the past, if I did that same partnership tomorrow, it might be a 20 percent discount.”
Ali Hutchinson, managing director at Brown Brothers Harriman, a private bank, predicted a wave of audits of those discounts. “The I.R.S. has nothing to lose,” she said. “‘You took a 35 percent discount, we think you should have taken a 21 percent discount.’ Then it’s just a negotiation of numbers, and not something untoward.”