Smaller refunds, a rocky year for investments and the threat of increasing audits make this tax season unlike those of recent years. What should wealthy clients look for as tax day looms?

“With credits returning to 2019 levels, huge losses from Wall Street and the new IRS new campaign to audit high-net-worth taxpayers, the 2023 tax season is very different compared with prior years,” said Moira Corcoran, Chicago-based CPA and finance expert with the website JustAnswer.

“We let [clients] know that in 2020 the IRS announced it would initiate exams on high-income taxpayers and that it can be expected to intensify,” Corcoran added. “We also let them know that they should be prepared to stay conservative on deductions, get ready to discuss the deductions and have supporting documentation.”

For all individual taxpayers, the average audit rate fell from 0.9% in 2010 to 0.25% in 2019, the Government Accountability Office (GAO) said in a recent report. Taxpayers with incomes of $5 million or more were the most likely to be audited throughout the decade, though they still saw their audit rates drop 86%. More recently, the IRS said audits for taxpayers making more than $10 million annually rose to 8%. And audit rates for the $1 million to $5 million category more than doubled to 1.3%.

Though it may not happen this year or even next, recently increased IRS funding “will likely result in more audits of taxpayers by the IRS,” noted Jeff Jackson of Jackson CPA PC and also a JustAnswer tax expert.

Wall Street was a bear last year, which wealthy clients will have to reckon with this filing season. “For the 2022 tax year, generally in most sectors but particularly in financial services, we’re seeing a significant number of high- and ultra-high-net-worth individuals having sizable capital or business losses,” said Varun Vig, a director in the Personal Wealth Advisors Group and a member of the Financial Services Group at Eisner Advisory Group LLC.

“Capital losses were running rampant. Buy and hold was not that popular in 2022 when stock prices plummeted,” added Mary Kay Foss, a CPA in Walnut Creek, Calif. “HNW taxpayers and/or their advisors were doing more trading than in the past few years.”

Capital losses can only be offset against capital gains and are subject to a $3,000 annual limitation for those married filing jointly, said Vig, who added that for 2022 excess business losses also are limited to $540,000 for those married and filing jointly. (Excess business losses can be carried forward as net operating losses). 

“Coupled with the crypto fiasco, high interest rates and fear of recession, clients are taking a guarded approach during 2023 and may continue until early next year,” Vig added.

Wealthy individuals taking required minimum distribution will notice that the required amounts will be much smaller in 2023 because of the large percentage decreases in retirement plan portfolios as of the end of last year, Foss said. “Some may rely on withholding from those RMDs to prepay taxes and avoid quarterly payments,” she said.

In some states, due dates are also on clients’ radar this spring. “Much of California suffered from storms that started in late December. The IRS and California responded by extending the due date for fourth quarter 2022 estimated tax payments from Jan. 17 to May 15,” Foss said. “The due date for Form 1040 was also pushed to May 15.”

For wealthy clients, the news isn’t all bad. In the filing season’s biggest headline for most taxpayers, some tax credits—the Child Tax Credit, Earned Income Tax Credit and Child and Dependent Care Credit—are reverting to pre-pandemic levels. But wealthy clients don’t qualify for these credits.

"High-net-worth clients will see an increased threshold for the top tax bracket. This will likely result in slightly lower tax bills,” Jackson said. “There are also higher retirement thresholds for contributing to 401(k) and Roth accounts [and] slightly higher standard deductions due to inflation and a slightly higher threshold for the 0% capital gains tax rate.”

“For the most part, high-net-worth taxpayers will likely be slightly better off this year than last,” Jackson said.