Year to year, the IRS generally audits less than 0.005% of tax returns. This minuscule percentage encourages tax dodgers who might want to make a fraudulent deduction or under-report income—it seems the odds are in their favor, and that rolling the dice might be a rational choice.

Of course, the overall percentage of audited returns doesn’t give the full picture. Returns aren’t randomly selected for scrutiny. The same activities that might appear worth the risk will, in most cases, place a return into a subcategory with a much higher likelihood of audit.

From the policy side, tax authorities are making a similar calculation in a cost-benefit analysis: Where should audit funding be targeted to maximize the government’s return on audit investment? What factors should influence the likelihood of a given return being audited?

Earlier in June, we got an answer from Harvard University. It turns out that while a $1 investment in audits of taxpayers who earn below the US median income yields $5, the same $1 yields $12 when auditing returns in the top 10% income bracket. These figures account for the additional costs inherent in auditing a high-net-worth individual, and the deterrence effects remain consistent across incomes.

This has policy implications for the IRS that can’t be ignored, with a practical impact on tax practitioners and taxpayers. Attentive readers of Bloomberg Tax will know a sea change is coming. When policies are formalized and changes announced, we’ll be here to explain them in detail.

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—Andrew Leahey

Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.

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State Insights

Bracewell’s Bucky Brannen reviews differences between Texas’ new property tax incentives program and the previous version of the program, identifying potential obstacles and considerations for applicants.

New progressive programs in Minnesota—and their supporting tax policies—will test whether states can enact changes typically under the federal government’s purview, says Mark Haveman of the Minnesota Center for Fiscal Excellence.

Federal Insights

The failures of Signature Bank, First Republic Bank, and Silicon Valley Bank following clean audits from KPMG more likely reflect poor bank management and not poor quality of KPMG’s audits, says Hofstra University’s Jack Castonguay.

Understanding Section 174 and Section 41 of the tax code can help reduce compliance risks and avoid exposing clients to penalties during an audit, say Rick Kleban and James Bean of Sycamore Growth Group.

Family-owned and operated businesses need to be aware of their tax obligations and must document expenses and other business decisions to avoid being blindsided by the IRS, says Chamberlain Hrdlicka attorney Jasen Hanson.

Global Insights

Lars H. Haverkamp of Eversheds Sutherland (Germany) explains the issues behind the recent protest from US House Republicans on the German IP tax, and the ongoing impact for multinationals.

Elisa Casi, Evelina Gavrilova, and Floris Zoutman of the NHH Norwegian School of Economics assert that their recent study proves the effectiveness of Danish reforms in enforcing the dividend withholding tax.

As debate on the future of the UK’s Inheritance Tax grows, Jo Bateson of KPMG reviews the current regime and the arguments involved in its potential reform or abolition.

The Indian government has eased the rules on the angel tax to encourage investment, but some issues on the applicability of the tax remain, as Aditya Singh Chandel and Suhail Bansal of AZB & Partners explain.

Commentary

A new tax dispute with Germany over intellectual property royalties is the latest in a series of discriminatory taxes against US companies, says Rep. Randy Feenstra (R-Iowa).

Tax Journals

Taxpayers shouldn’t believe tax “strategy” promoters who would have them misapply rules relating to charitable remainder annuity trusts and stepped-up basis to generate tax-free income for noncharitable beneficiaries, says attorney Richard L. Fox.

*Note: Your Bloomberg Tax login will be required to access Tax Journal articles.

Columnists

A tax bill making its way through the New Jersey Senate is bad for recovery efforts, writes Andrew Leahey. Instead, the state should offer a solution that incorporates income from both tangible and intangible assets into its tax repatriation regime.

Career Moves

Greg LaCasse, a CPA, has been promoted to partner at Whittlesey.

Diane Clarkson has joined Akerman as a transactional tax partner, the firm said.

Michael Ding has been appointed to WeirFoulds’ Advocates’ Society’s tax litigation practice group.

Stefano Mariani has been appointed to tax disputes counsel at Baker McKenzie in Hong Kong.

Sam Kamyans has joined Kirkland & Ellis as a partner in the tax practice group in the Washington office.

Carey Xu and Sarah Rust have been appointed as solicitors at Michelmores in the tax, trusts, and succession team in London

Chris Luna has joined Foster Garvey as of counsel in the tax and benefits practice group.

Mike Dolson has joined McCarthy Tétrault as a partner in its national tax group in Toronto.

Spotlight

This week’s Spotlight is on Sahel Assar, the leader of Buchanan, Ingersoll & Rooney’s blockchain and digital asset practice group. Assar, an international tax lawyer, has represented international families and entrepreneurs in Europe, the Middle East, and Asia with US connections.

News Roundup

It’s been another busy week in tax news from state capitals to Washington. Here are some stories you might have missed from our Bloomberg Tax news team.
*Note: Your Bloomberg Tax login will be required to access Tax News.

• Big Four accounting firm KPMG has been shaken by one of the biggest economic stories of the year—pilloried for giving clean audit opinions for three banks that collapsed amid an interest rate crisis threatening the regional bank sector.
• Texas will exempt menstrual products and family-oriented items such as diapers and baby wipes from sales tax under a bill signed by Gov. Greg Abbott (R) .
• Hunter Biden, President Joe Biden’s son, will plead guilty to two misdemeanor tax crimes and enter an agreement with prosecutors to potentially avoid a charge for possessing a gun while addicted to an illegal drug, according to the US attorney’s office in Delaware.
• The US Senate gave overwhelming approval Thursday on a long-sought tax pact with Chile, ending more than a decade-long odyssey to get the treaty across the finish line.

Our Wish List

With 46 states starting their fiscal year on July 1, we’re looking for Insights that focus on what tax professionals should know about the most recent changes in state and local taxes. We’d also like pieces about the shifting landscape for state digital taxes.

If you have an interesting, never-published article for publication, you can contact our Insights team by email at TaxInsights@bloombergindustry.com.

Our Team

We talk about tax a lot. But there’s much more that you might hear us talking about if you popped into one of our Teams meetings. Here’s a quick look at what some of us are watching, reading, and listening to this week.

Watching
Rebecca Baker (Editor-at-Large): “The Woman King” on Netflix. The choreography of the fight scenes is nothing short of amazing, and the performances were top-notch.

Reading
Andrew Leahey (Columnist): “The Big Break” by Ben Terris. It’s a look at how Washington, D.C., changed following the departure of former President Donald Trump.

Listening
Melanie Cohen (Content Editor): “Dishin’ Days,” a weekly recap podcast for the soap opera “Days of Our Lives.” It’s almost as entertaining as the show itself!

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