Warren’s wealth tax would be a pain for the IRS and a boon for appraisers

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Senator Elizabeth Warren’s campaign promise to fund social programs by making America’s wealthiest pay a small percentage of their fortune every year could create a costly and difficult compliance system for both the taxpayers and the IRS.

A wealth tax affecting the country’s 75,000 richest households could raise $2.75 trillion over the next decade, according to Warren’s plan. This proposal is her answer when asked how she plans to play for expanded child care and debt-free college — assuming it could actually be implemented.

“It would be difficult for the Service to get its arms around the wealth tax,” said Mark Everson, a former Internal Revenue Service commissioner, referring to the agency’s nickname in tax circles. “The more money people have the more they tend to have in non-traditional assets.”

Warren envisions a yearly tax on household wealth — 2 percent on fortunes of more than $50 million and 3 percent above $1 billion — as a way to reduce wealth inequality and pay for progressive priorities. The concept is simple enough: Every asset is counted, an expanded IRS audit force would ensure that people pay, and rich individuals who leave the country to avoid the wealth tax have to pay an exit penalty.

Determining how much someone is worth, however, is complex and can often lead to contentious standoffs between taxpayers and the government. Warren’s plan would rely on a combination of people self-reporting the value of their assets, as well as the IRS obtaining some data from banks and financial institutions.

Web of investments

Some of this is within current IRS practice, according to Gabriel Zucman, an economist at the University of California at Berkeley who advised Warren on her plan. The agency already collects some income flow information — interest income, dividends, capital gains — through banks, mortgage lenders, mutual funds and insurance companies.

It would be very simple to add one line on these information returns with the end-of-year account balances, Zucman said. The IRS already keeps tabs on household wealth using forms reporting the end-of-year value of individual retirement accounts.

The hard part comes when wealthy people don’t just have cash, stocks and bonds that can be easily valued. People worth more than $50 million tend to have a complex web of investments that can include highly speculative assets, such as oil and gas rights or minority stakes in privately-held companies, where good-faith appraisers could vastly disagree on the value.

People apt to cheat on their taxes will always find ways to suppress their net worth to minimize the amount of tax they have to pay or avoid it entirely. But the subjective nature of appraisals leaves a lot of room for reasonable people to disagree. Factors including the size of the taxpayer’s stake in a company, the existence of comparable publicly traded companies, the ease of selling the business and future risk factors — such as a business located in a flood plain or volatile oil prices — can each affect the value by as much as 40 percent.

‘Radically different answers’

“You could have two qualified appraisers with two different viewpoints come to radically different answers about the value,” Matt Crane, a New York-based appraiser who defends valuations in front of the IRS, said. “Every time the IRS has looked at one of my appraisals they have always found something they don’t agree with.”

For example, the IRS would have a relatively easy time determining the majority of Jeff Bezos’s wealth, since approximately $105 billion of his $113.2 billion net worth is from Amazon.com Inc. stock, according to the Bloomberg Billionaires Index.

But it could be a complicated and costly battle for the IRS and Bezos to agree on the value of his space exploration company Blue Origin. Bloomberg Billionaires index values it at $5.4 billion but points out that determining the actual worth is difficult because of its nascent stage, the lack of strategy details and the fact that Bezos is the sole shareholder with no apparent intent to sell.

Someone like Charles Koch, who owns portions of at least a dozen closely-held companies, would be a nightmare for an IRS auditor to verify annually. Koch is worth an estimated $59.4 billion, with stakes in pipelines, chemicals, paper and industrial businesses.

It’s also a time-consuming process for the taxpayer, as well as the IRS. A typical appraisal takes about four to six weeks, said Ray Koji Bratcher, business appraisal specialist in Los Angeles, California. The details about how often appraisals would be required haven’t yet been specified in Warren’s plan, but annual valuations under a wealth tax would likely mean there would be more businesses to be appraised than the people who are trained to do that work could complete, he said.

“What we need to make the wealth tax work in the short run is high audit rates on the very rich, which is feasible,” Zucman said. He suggests an audit rate in the 30 to 50 percent range.

But the IRS has shrunk in recent years as Congress has repeatedly cut the agency’s budget. The IRS had 9,346 fewer examination and collection agents in 2018 than in 2010, a loss of more than 22 percent of the audit workforce, according to agency data. With that, the IRS lost experienced examiners that would be able to tackle auditing exceptionally wealthy people, according to Everson, the former commissioner.

Audit rate

Adding a wealth tax to the agency’s responsibilities would be a tall order, according to Tommy Wright, a partner at the accounting firm RSM.

“I question how in the world is the IRS going to have the wherewithal to contest it and enforce it,” Wright said. “The IRS doesn’t have much in its arsenal.”

The IRS currently audits about 30 percent of estate tax returns of people worth at least $10 million when they die, which matches the rate Zucman suggests to enforce the tax. But only 1,283 estates worth that much were examined in 2018. Extending examinations of about one-third of the 75,000 wealth tax returns that would need to be filed each year would add an additional 25,000 audits to the IRS’s workload.

The process of paying the wealth tax could also be expensive for the wealthy, before even accounting for how much they owe. Appraisals for real estate can cost as much as $10,000. Business appraisals can range from $10,000 to $50,000, depending on the complexity.

“You’re talking $150,000 to do the valuations every year,” John Mezzanotte, a managing partner at accounting firm Marcum, said. “That’s a conservative estimate.”

However, for those who make their living valuing other people’s businesses, the wealth tax is a money-making opportunity, according to Crane, the New York-based appraiser.

“It would be a windfall for the rest of eternity,” he said.

Laura Davison
Bloomberg News
Elizabeth Warren IRS Wealth management Tax planning Tax audits