The Internal Revenue Service (IRS), along with the U.S. Department of Justice, has launched a massive effort to identify and prosecute tax evaders from the medical profession. A major emphasis is to initiate criminal investigations and perform audits of thousands of healthcare providers, focusing on issues such as tax shelter schemes, concealment of income and excessive deductions.
The IRS and the Justice Department released the following as real-life examples to illustrate some of their focus:
- A Cleveland physician had concealed income in a sham corporation and reported income on the returns of other taxpayers. He was sentenced to two years and ordered to pay back $330,000.
- A physician in Missoula, Montana, was sentenced to 18 months in prison for attempting to conceal income and assets by placing them into a sham corporation.
- A California ear, nose and throat specialist was convicted along with two other doctors in a scheme to funnel income to offshore trusts in an attempt to avoid taxation. The doctors were advised by a Utah trust promoter.
- A physician in Michigan was sentenced to 15 months in prison for depositing medical practice revenue into his personal credit card account and a personal investment account while failing to notify his accountant about the unreported income.
The promotion of tax shelter schemes and sham trusts lacking any real economic substance has risen in popularity. Physicians are frequently a target of these criminal promoters and are often approached by a tax shelter advisor who promises results that are truly “too good to be true.” Some of the goals of sham trusts and tax shelters include creating offshore diversions of income and bogus deductions. Keep in mind, however, that U.S. citizens are taxed on their worldwide income, no matter where it is kept.
Legitimate trusts, by comparison, are a great tool and often used for estate planning, asset protection and charitable transfers of property. The issues to keep in mind are fairly simple. The person controlling the income as if the trust or tax shelter had never been created should ordinarily be taxed on the income transferred to or generated in that trust.
Additionally, the IRS has developed Audit Techniques Guides to assist with audits of the medical profession. Taxpayers can gain valuable insights about issues that might surface in an audit by reading these guides and making sure their records and documentation are kept in accordance with these IRS guidelines.
The bottom line is to be prepared for a potential IRS audit and aware of red flags that can cause additional IRS scrutiny. Some of those red flags include:
- Significant inconsistencies between the current year tax return and prior years’ returns
- Expenses that are not within industry standards or norms
- Miscalculated or unusually high deductions, such as travel and entertainment expenses
- Employee/owner salaries that are inordinately lower than those in similar practices
By taking a proactive approach to how you track, document and report tax-related information, you will decrease the chances of an IRS audit.
Jim Rice, CPA, is a Shareholder at Sol Schwartz & Associates P.C. He has over 38 years of experience in public accounting. In addition to providing business consultation, financial planning and various other accounting services, Rice specializes in income tax planning and consultation. He works with a high concentration of physician practices and high net-worth individuals. Contact him at firstname.lastname@example.org or 210-384-8000, ext. 112.
Christopher Davis, CPA, is a Manager with Sol Schwartz & Associates P.C. and has been practicing public accounting since 2008. Davis practices in various areas of public accounting including tax compliance and consulting for individual, corporate, S corporation and partnership taxation. He is a member of the firm’s healthcare niche that specializes in identifying and implementing solutions to achieve the goals of the firm’s physician clientele. Contact him at email@example.com or 210-384-8000, ext. 118.