It's no surprise that Californians--especially Southern Californians--are more likely to be audited by the Internal Revenue Service than are taxpayers in other parts of the country.
Figures recently released by a New York watchdog group and reported Sunday in The Times show that 1.59% of taxpayers in the IRS' Los Angeles district went through face-to-face audits, compared with 0.66% nationwide.
Various explanations were advanced: California has a tradition of tax avoidance; immigrants here may not fill out returns properly; the state's high earners and entertainment industry workers have been targeted by auditors in the past.
But another factor could be at the heart of the matter: The state's army of entrepreneurs is made up not only of creative business owners, but probably creative tax filers. What a business owner sees as a legitimate deduction the IRS may view as tax avoidance.
A case in point is the ongoing attempt by the IRS to eliminate certain deductions used by family-owned businesses to pass on assets to subsequent generations. Known as the "Crummey exemption" and family partnership discounts, these obscure and complex estate-planning tax rules will be scaled back if Congress adopts President Clinton's budget resolution this year.
"Those particular planning techniques are very important for family and business reasons," said Russ Nager, a certified public accountant and an editor at the Family Business Advisor, a monthly newsletter affiliated with the Arthur Andersen Center for Family Business in Houston. "When proposed, they caused considerable uproar in the estate-planning community. Family-owned businesses should be aware of what is proposed."
These rules are viewed as tax loopholes by Treasury Department officials, who for more than two decades have tried to get Congress or the president to ban them, Nager said. The effort this year is particularly galling to small-business activists, who just last year celebrated tax breaks received under the 1997 Tax Reform Act. The changes proposed by Clinton would nullify some of those hard-won gains, Nager and others say, because family-owned businesses rely on these tax provisions for estate planning.
Here's what the rules are and how they work:
