What are your chances of an IRS audit?

THE FEAR OF a call from an IRS audit agent matches the fear of flying or going to the dentist. So, what are your chances of getting hit with an IRS audit?

Every year the IRS releases a report showing the “Percentage of returns audited.” The 1999 report was issued recently. The results of this report compared to 1998 appear in the chart on this page.

Interesting, isn’t it? The audit rates dropped in every category. Two lessons are obvious: 1) An S corporation is the way to go, as opposed to a C corporation, if you want to keep the IRS out of your business hair. Partnerships are even better. 2) Estate planning, to remove your largest assets from your taxable estate yet control them for as long as your live, is a must.

Help from the IRS

Believe it or not, the IRS has set up an organized system to help you with unresolved tax issues, ask tax questions and get more information.

Got a problem with the IRS that just won’t go away? You may want to contact the “Taxpayer Advocate,” an ombudsman who is responsible for protecting your rights and resolving problems not addressed through normal IRS channels. Call your Taxpayer Advocate at 877/777-4778.

The IRS’s Web site, www.irs.gov, enables you to download forms and publications; search for a form or publication by topic or keyword; view Internal Revenue Service bulletins published in the last few years; and search the Internal Revenue Code and Treasury regulations.

Or receive your forms by fax. Call 703/368-9694. Follow the prompts. If you need help, call 703/487-4608 (the Fed World Help Desk). Or order your forms by phone, 800/829-3676.

Do your prefer your forms and other information from a CD-ROM? Call the National Technical Information Service to purchase one for a modest charge, 877/233-6767.

Long-term care

It’s estimated that 60% of Americans soon or later will need home care, live in an assisted-living facility or spend time in a nursing home during their lives. When you reach age 65, you have a 40% lifetime chance of entering a nursing home, and a 10% risk that you will stay there at least five years. The source of this data is the U.S. Department of Health and Human Services.

In spite of these overwhelming statistics, only 5% of Americans 65 and older purchased LTC policies.

According to an in-depth article on LTC in the Sept. 24, 2001, issue of Accounting Today by Wilma G. Anderson: “Most people, especially men, like to think that won’t happen to me despite the statistics. They’ll say things like, ‘Everyone in my family just drops dead.’ Or, ‘call me when I’m closer to 70.’”

OK, guys, listen up.

In 1997 the tax law concerning LTC changed. You’ll relish these tax goodies:

1. All employees (even if you own 100% of the stock) of a C corporation receive a tax-free fringe benefit when the corporation pays your LTC premiums. The corporation deducts the entire premium. For example, if your premiums are $10,000 per year, you pay no tax for this benefit, but the corporation (assume a 40% tax bracket) only has a net cost of $6,000.

2. The C corporation can pay your spouse’s LTC premiums with the identical tax result in No. 1 above.

3. If you are an S corporation, the results are the same as a C corporation for all the employees, except for employee/shareholders who own 2% or more of the corporation’s stock. For such employees the income tax benefits are reduced.

4. Premiums paid by you directly (not by your employer) are partially deductible.

5. Any and all LTC benefits paid (whether $1 or $1 million) are tax-free.

6. When you die, all the premiums (say $300,000) you paid or your employer paid for you are paid back (the entire $300,000) to your heirs. The final economic result: Your LTC insurance is free.

7. You can actually make a profit. Say you paid $300,000 in premiums over your lifetime and deducted $150,000. In a 40% bracket, you would have saved $60,000 in income taxes. Death brings the entire $300,000 back to your heirs, a $60,000 profit.

And if your lawyer knows how to draw the proper documents, the premiums will go to your heirs at your death, estate tax free.

Caution: This article does not cover all rules, exceptions and traps concerning LTC.

Irving Blackman is a partner in Blackman Kallick Bartelstein, 300 S. Riverside Plaza, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].