You Think You Got Audited?

Getting an audit notice from the IRS isn't any one's idea of a party. But it's not the end of the world. Usually the auditor just wants to make sure you're entitled to the breaks you've claimed. Did you really spend as much as you reported on meals & entertainment? Did you really spend enough hours managing your rental properties to qualify as a "real estate professional"? If the IRS finds a mistake, they issue a "deficiency notice" and bill you for what you owe. How bad can it really be?

Well, just ask Raymond J. Lane.

Ray Lane is a longtime tech industry veteran. He started his career at IBM, then moved to Electronic Data Systems and Booz Allen Hamilton before becoming Chairman and CEO of Oracle Corporation. More recently, he's been a partner at the venture capital firm of Kleiner Perkins Caufield & Byers, a board member at Fisker Automotive, and non-executive Chairman of Hewlett-Packard.

In 2000, Lane invested $25 million into a partnership, Vanadium Partners Fund LLC, to invest in technology start ups. The fund used a strategy called "Partnership Option Portfolio Securities," or POPS, to generate paper losses far in excess of his actual investment. Then he claimed $251 million in losses to offset income he recognized from exercising Oracle stock options.

Since then, the government has taken direct aim at POPS and similar "abusive" strategies, arguing that they lack economic substance. Lane reports that the IRS originally audited him in 2004, then asked him to sign extensions on a statute of limitations every 18 months while they reviewed his file. Last December, they found the partnership to be a sham, with no "legitimate business purpose." In fact, they argued, Lane's $25 million "investment" — which he claimed was for warrants in the LLC — was designed merely to disguise fees paid to tax-shelter promoters and tax professionals. Lane filed an appeal with the Tax Court. Then, on May 6, he announced he had signed an agreement to pay the IRS $100 million!.

For his part, Lane says "the thing is unfortunate." (Really?) He adds that "the amount of taxes I pay are staggering, and this is the only transaction I've been audited on." He claims to have paid between 32% and 38% of his income in net taxes in the past 15 years. Now, while paying the $100 million to the IRS will certainly hurt, it won't put him in the poorhouse. He still owns two homes across the street from each other in pricey Atherton, California, worth a total of $30 million, along with a home in Manhattan Beach worth $20 million, a farm in Oregon worth $4 million, and two properties in Palm Desert, California, worth another $10 million.

But still . . . a $100 million tax bill! Can you imagine signing that check? Or even authorizing that wire transfer?

Here at our firm, we understand that if you ever get an audit notice, you're not going to be happy — even if there's not a hundred million bucks at stake! That's why we stick with tried-and-true strategies to help you pay less. Everything we recommend is court-tested and IRS-approved. So call us to see how you can put some of these strategies to work for yourself!