A lot has been written in the news recently about the IRS deciding to increase its enforcement of tax laws. Because when the American people are suffering under inflation at 40-year highs, and the federal government is spending trillions of dollars every year that it doesn’t have, the real problem is people not paying enough in taxes. But let’s not digress.
The most common version of the story is that the IRS is hiring 87,000 new tax auditors. While that’s playing a little fast and loose with the facts, the fact is that the IRS is getting nearly $80 billion in additional funding, $46 billion of which will be used to enhance enforcement of tax laws. So even if the IRS isn’t hiring 87,000 new tax auditors, it will likely be hiring new auditors, and rates of tax auditing are likely to increase.
The Biden administration has pledged that taxpayers making under $400,000 a year won’t be at heightened risk of audits. But can we trust the administration to keep its word?
After all, Biden once claimed that he wouldn’t raise taxes on anyone making under $400,000 a year. But the Joint Committee on Taxation recently looked at the Inflation Reduction Act and found that in calendar year 2023 alone, 73.4% of Americans making between $100,000 and $200,000, and 42.1% of Americans making between $75,000 and $100,000 per year would see tax increases of greater than $500.
In fact, the majority of Americans, even those making less than $10,000 a year, would see tax increases under this recently passed legislation in 2023. So if we can’t trust Biden not to raise our taxes, how can we trust the IRS not to audit us?
No One Expects an IRS Audit
If you’re an average middle class American, you’ve probably never given a second thought to the idea of a tax audit. IRS staffing levels have fallen, as has enforcement, so that very few people today find themselves subject to an audit.
Those that do get audited generally dislike the process, to put it mildly. If more middle class taxpayers end up becoming the subjects of IRS audits, some people are beginning to speculate whether that could end up influencing investor behavior and pushing people to invest in tangible assets that could conceivably remain outside the scope of a potential audit.
There are some who would undoubtedly say that if you don’t want to end up getting audited, don’t be a tax cheat. But here’s the problem: everyone is a tax cheat.
That’s not a controversial statement either, as the sheer volume of tax law is so massive that no one individual could possibly hope to understand it or comply with it. And even those who do understand much of it probably don’t comply with it either.
As Lavrentiy Beria, Stalin’s secret police chief said, “Show me the man and I’ll show you the crime.” Find yourself the subject of an audit and you may very well find out just how little you know about the tax code.
In many states, you as a buyer are required to pay use tax when you buy goods at yard sales or garage sales. How many people deriding tax cheats or saying that the rich need to “pay their fair share” actually report those purchases on their state tax forms each year? And the federal tax code is even more complex and convoluted than state tax codes.
The job of tax auditors is made easier nowadays because so much information is available digitally. Electronic transactions and digitized information make finding out what you own and what you paid and didn’t pay much easier for auditors. So if audit rates start increasing, the speculation is that investors may decide to move their assets from intangible financial assets which have an easily identifiable digital footprint to tangible assets like gold and silver.
Will Demand for Tangible Assets Increase?
You may already be familiar with a gold IRA or silver IRA, an individual retirement account (IRA) that performs just like any other, only that it holds physical gold and silver coins or bars rather than conventional financial assets like stocks and bonds. A gold IRA or silver IRA can be a way to protect your existing retirement assets, such as those you hold in a 401(k), 403(b), TSP, IRA, or similar retirement account.
Perhaps more importantly for many people, a gold IRA or silver IRA can be funded with a tax-free rollover from an existing retirement account. That allows you to use your existing retirement savings to purchase gold and silver, while not having to pay taxes you would owe if you had to take a distribution from your retirement account.
But it’s important to remember that a gold IRA or silver IRA is not a way to evade taxes. Nor is it a way to hide your assets from the government or keep you safe from an IRS audit.
The gold and silver that you hold within an IRA is treated just like any other IRA or 401(k) asset you own, which means that it is managed by a custodian and, because they are precious metals, stored at a bullion depository. You’ll also have to pay taxes on any distributions you take from a gold IRA or silver IRA, and you’ll be subject to required minimum distributions (RMDs) once you turn 72.
As useful as a gold IRA or silver IRA can be, however, there are still plenty of people who prefer to hold their gold and silver in physical form, storing their precious metals at home. These are the people who might think that by keeping their gold and silver at home it will be safe from prying eyes.
To a certain extent that’s true. If you buy gold and silver coins for home storage, or you take a distribution from a gold IRA or silver IRA in the form of physical gold and silver coins or bars, no one will necessarily know where those coins end up. You could keep them in a safe deposit box, under your mattress, or in your sock drawer. Gold in particular is compact enough that you could store vast amounts of wealth at home in a relatively small footprint.
Storing gold at home isn’t a panacea when it comes to trying to avoid an audit, however. If you buy gold coins, store them at home, then sell them at some point in the future, you’ll still owe taxes on any appreciated value. But just like the taxes you owe on goods you buy at a garage sale, many people either don’t know they need to report those sales, or they aren’t going to report those sales.
And even if they end up getting audited, the IRS isn’t necessarily going to know how much physical gold and silver they had, how much they disposed of, when they disposed of it, or for what price they sold it. The paper trail essentially ends once physical gold and silver is in your possession, which is why many people may decide to turn to physical gold and silver in the future.
If demand for gold and silver increases as a result of that strategic positioning, it could benefit existing gold owners, including holders of gold IRAs and silver IRAs. So while the jury is still out on what exactly the IRS’ new funding will pay for, there’s at least a possibility that it could drive more demand for gold and silver.