Then a letter comes in the mail. It’s from the IRS and there’s a great big, hefty number at the bottom of the letter and it’s a number that they say you owe in taxes. Failing to pay federal income taxes could result in garnished wages… or worse.

Who are you going to call?

The IRS Hitman is a new reality TV series following an ex-IRS official who left the IRS to become an advocate for over-taxed taxpayers. Follow him as he travels around the country helping families who are suffering from the burden of tax debt and the heavy hand of the IRS.

Check out the show’s trailer here:
IRS Hitman trailer

Visit the show’s website at IRS-Hitman.com. The IRS Hitman premieres on June 6th. You can follow them on Facebook and on Twitter.

My prediction? This could be an entertaining show: These are real people who need the help of an insider to save them from the most powerful collection agency in the world.

Seems like we could all use an IRS Hitman sometimes, and we applaud everyone who helps defend the rights of innocent taxpayers. If you need help with undue tax burdens and are put off by an aggressive reality show, please contact our tax office and we will create a custom strategy to help you use every available legal tool to fight the IRS.

What I find interesting is that in 2003, only 81% said it was unacceptable to cheat on taxes and in 2008, 89% said it was unacceptable to cheat on taxes.

Along with the answer of “completely unacceptable” (the orange bars in the graphic below), somewhere between 6% and 12% believe that it is okay to cheat a little here or there (the light blue bars, below). And 3% to 5% of respondents believe that you should cheat as much as possible.

You can read the rest of the article at the New York Times.

So I went and dug up the number of tax returns filed to see what this meant in real numbers. Let’s use 2008, because we have all the data we need from that year:

In 2008, according to a report by the IRS, 155 million tax returns were filed. So here’s what it meant for 2008 tax returns:

• 89% of respondents, or 137,950,000 tax returns were completely honest.
• 6% of respondents, or 9,300,000 tax returns had a few cheats here or there in the return.
• 3% of respondents, or 4,650,000 tax returns were as dishonest as possible.

Those are interesting numbers. Here’s my take on them: I believe in paying less tax, but I believe in doing so legally. The IRS needs to be more understanding with people who are having difficulty paying their taxes, and they need to offer them real options to help them with their tax debt.

Most people with IRS problems want to want to pay their tax debt, but if money is tight, they need the IRS to be more willing to work out an arrangement. Whether that’s a payment plan or an Offer in Compromise settlement offer.

And just as importantly, the IRS needs to create ways to reduce the number of income tax cheaters (13,950,000 tax returns have some form of dishonest response).

By being so tough on honest people who are having trouble paying their tax debt, instead of going after the cheaters, the IRS is not doing its job as well as it sould.

Here’s the situation, as reported by the WCF Courier and summarized here for your convenience: Last year, people had jobs and income but not all of them had sufficient taxes taken out of their paychecks. This year, some of those people don’t have jobs. The problem? They earned taxable income but now have no income to pay their back taxes.

That’s a difficult situation to be in. On the one hand, I understand the desire that these taxpayers had initially to avoid the constant pay-reducing reminder of income tax by delaying their tax payments. On the other hand, it is a bit like gambling in the sense that they are accepting the risk that they will have an income to pay the tax debt at a later time.

What’s the solution? Unless we reduce or eliminate the excessive taxation of American taxpayers, I don’t see an easy solution. And I’m not about to say “well, they should have…” because should-haves don’t solve the problem right now.

Their best option is to file their income tax and pay what they can, even if they can’t pay it all. As the article correctly points out, the penalty for not filing is greater than the penalty for filing and not paying. So it always “pays” to file your tax return, even if you can’t pay.

The next thing they should do immediately after filing? Contact a licensed tax attorney. It is my belief that tax attorneys are the one group of tax professionals best trained to assist you. I believe they’re more aggressive in representing you than a CPA or accountant would be. Tax attorneys aren’t afraid to look at different options which might help you.

Tax attorneys aggressively go to bat for taxpayers who are staring at the open hand of the “tax man” and wondering how they will fill it. We use 100% legal tax resolution strategies, tried and perfected over the years, to help people in difficult tax situations.

No tax case is hopeless, and of course the options will vary from case to case.

Don’t hestitate to give us a call if you want to discuss your tax case.

(Read the full WCF Courier article here)

First, consider the states with the highest and lowest median household income.

The highest ten in 2008 (in order from highest to lowest) were:

1. New Jersey
2. Maryland
3. Connecticut
4. Alaska
5. Hawaii
6. Massachusetts
7. New Hampshire
8. Virginia
9. California
10. Washington

(Source: Wikpedia)

Now, check out this map of state and local tax burdens:

The top ten highest tax burdens are:

1. New Jersey
2. New York
3. Connecticut
4. Maryland
5. Hawaii
6. California
7. Ohio
8. Vermont
9. Wisconsin
10. Rhode Island

So, what does that tell you? It tells me that the greediest states are New Jersey, Connecticut, California, Hawaii, and Maryland and they are getting a lot of money by burdening their higher-than-average income earning populace with a higher-than-average tax burden. We’re not just talking about tiered taxation but about geographic taxation!

It also tells me that the tax payers in Alaska and New Hampshire are very fortunate: They each are in the top ten average median income-earning states but they are also each in two of the bottom ten tax burden states – New Hampshire has the 46th lowest tax burden and Alaska has the 50th lowest tax burden.

1. Dependents may be required to file their own tax return. Even though you are a dependent on someone else’s tax return, you may still have to file your own tax return. Whether or not you must file a return depends on several factors, including: the amount of your unearned, earned or gross income, your marital status, any special taxes you owe and any advance Earned Income Credit payments you received.

2. Exemptions reduce your taxable income. There are two types of exemptions: personal exemptions and exemptions for dependents. For each exemption you can deduct $3,500 on your 2008 tax return. Exemptions amounts are reduced for taxpayers whose adjusted gross income is above certain levels, which is determined by your filing status.

3. Dependents may not claim an exemption. If you claim someone as a dependent, such as your child, that dependent may not claim a personal exemption on their own tax return.

4. Your spouse is never considered your dependent. On a joint return, you may claim one exemption for yourself and one for your spouse. If you’re filing a separate return, you may claim the exemption for your spouse only if they had no gross income, are not filing a joint return and were not the dependent of another taxpayer.

5. Some people cannot be claimed as your dependent. Generally, you may not claim a married person as a dependent if they file a joint return with their spouse. Also, to claim someone as a dependent, that person must be a U.S. citizen, U.S. resident alien, U.S. national or resident of Canada or Mexico for some part of the year. There is an exception to this rule for certain adopted children.

For more information on dependents and exemptions, including whether or not you or your dependent needs to file a tax return, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information.

Reference Links:

• IRS Publication 501, Exemptions, Standard Deduction, and Filing Information
• NWLC The Expanded Child and Dependent Care Tax Credit in the Family Tax Relief Act

The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed.  The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about Distributions from Coverdell Accounts:

• Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
• There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
• The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
• If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax.  Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income.  Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.

If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM (800-829-3676).  

Remember that for the genuine IRS Web site be sure to use .gov.  Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.

• Publication 970, Tax Benefits for Higher Education (PDF 368K)
• Tax Topic 310 — Coverdell Education Savings Accounts

IRS Tax Tip 2007-48 — Offset Education Costs 

But recently, the IRS seems to have realized that they can only bleed someone for so long. If they keep taking their pound of flesh, they are eventually left with taxpayers who have nothing else to give. And this is the case even more so now than ever before because of the economic turmoil facing the world.

So, the IRS has “graciously” conceded to “additional steps to help people who owe back taxes”… in particular, for those who are facing “unusual hardships”. . Here are some of those additional steps:

The IRS increased the authority of its employees to suspend collection when there’s a hardship situation. This includes:

• Job loss
• Social security or welfare recipients
• Significant medial bills

Taxpayers who have difficulty making payments (because of a number of reasons including job loss) may skip a payment or pay reduced payments.

Also, the Offer in Compromise has been augmented to allow for drops in home values (which once may have created difficulty in getting the IRS to agree to an OIC). And those who have an OIC agreement but are at risk of default now have options to avoid default.

Lastly, the IRS is speeding up its delivery of levy releases by reducing the requirements that taxpayers must meet when requesting a levy release.

In some ways, it’s nice to see the IRS finally recognizing that it needs to help people who want to pay their taxes but cannot. After all, it costs taxpayers a lot of money to punish taxpayers who aren’t paying their taxes… and law-abiding taxpayers who simply are not able to pay should not face dire consequences, particularly in this economy.

But let’s be realistic: While it’s nice to see the IRS doing something about it, the only reason they’re doing it is because they know that the pound of flesh is running out. They know that they can’t get more money out of taxpayers in the traditional way, and with the economy making it more and more difficult, they have developed “creative financing” to make it happen.

Tentative kudos to the IRS.

Your recent election to the highest office in the land was a loud call from some American voters that they wanted you in office. And those who didn’t vote for you? Well, you’re their President, too. As you recognized at your inauguration, we live in challenging times.

I’m not here to talk about wars or the economy or the work you have to do in representing the millions of people who did, and who did not, elect you to office.

I’m writing this letter to remind you that the White House is not your house. It is my house… and the house of the millions of other taxpaying Americans who live in our great nation. In other words, the work you do and the decisions you make should always be guided by remembering the people on whose backs this nation is funded. You should follow the Constitution, and not do anything that contradicts it.

As a fellow American, representing other Americans, I write to you requesting the following considerations:

• Don’t be drawn into Washington’s bad habits of spending millions of dollars without fully realizing that each and every one of those dollars came out of a taxpayer’s pay check.  Plus the interest which must be paid to the government’s creditors
• Remember that you were voted in my millions of people who have to work long days (and sometimes 2 jobs) because they are overburdened in the taxes they pay. If they paid less tax, they would have more to spend and spending is good for the economy.
• Right now, you probably have other people preparing your income tax return for you because your focus is on the American impact of global affairs. But don’t forget that millions of Americans will have to prepare increasingly complicated income tax returns.
• Bureaucracy is costly. While a small part of the government’s bureaucracy   is Constitutionally necessary to run our country, simplicity and clarity should win out every single time. Your administration should model for American companies what a lean, efficient, spending-conscious organization should be like.
• Your taxpaying public is made up of less well off people, middle class, and wealthy people. And all of those groups should be treated fairly and not punished. America is a land of opportunity, not class warfare.  We shouldn’t tax the rich just to give to the less well off. That is a form of tyranny of the majority toward the minority.  We all hope to someday do well, please don’t treat those folks who happen to be doing well like cash cows to be milked for the rest of Americans spending whims.

We’re a great nation in a world that is experiencing turbulent economic times, and our hard-working, taxpaying people are already suffering under a terrible tax burden.  We need you to follow in the footsteps of our Founders and spend less on bailouts and things that will cause tax increases, and more on restoring the sense of limitless opportunity in this country!

We do our best to avoid death’s inevitability by eating right, exercising, cutting down on sweets and cigarettes, and making sure we look both ways before crossing the street.

And as for taxes – that’s a little more complicated.

You see, the IRS draws a line between tax avoidance and tax evasion. In general terms, here’s the difference:

• Tax avoidance is when someone works within existing laws to pay the least amount of taxes that the IRS says are rightfully due from them. Tax avoidance is legal.
• Tax evasion is when someone works outside of existing laws by not paying the taxes that the IRS says are rightfully due from them. Tax evasion is illegal.

Tax avoidance is perfectly legal, and the United States Supreme Court has recognized this fact. The Court has stated that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” See Gregory v. Helvering.

Let’s look at an example: Tax avoidance is when someone creates a legitimate company (like a home-based business) to take advantage of tax write-offs that come with owning a business that is producing a profit. The person actually sells goods or services in their spare time and reaps the rewards by being able to write-off a portion of their home and car. Tax evasion is when someone sets up a fake company, which doesn’t actually do any business, to hide income that they’re earning so that they don’t have to pay taxes on it.

Of course, that’s just one example but there are many others. In helping taxpayers with IRS taxation issues, I would heartily advise legal tax avoidance efforts. Some of those include:

• Set up a profitable small business
• Claim all deductions that you rightfully can claim
• Put as much money as possible into your 401k

Having said that, let me now highlight a challenge that taxpayers are facing now and going to face in the future: The shrinking opportunity to legally avoid taxes. In some cases, tax loopholes exist which taxpayers are legally taking advantage of, but those loopholes are closing. In other cases, the IRS creates layer after layer of obfuscation and complexity so that tax advantages are minimized.

What can you do about it? Frankly, not much. When Congress and the IRS detect that their pockets have a small hole in them, resulting in precious nickels returning to the taxpayer’s pockets, you can be sure that they’ll get out the red tape and they’ll sew up their pockets to collect more.

But until then, take advantage of those opportunities!

In my last post I talked about two stunning statistics and referenced that someone was trying to poison Woody Allen. Today, I want to give you some advice on becoming a good statistic.

On the IRS statistics page, the government writes the following (and I’m just quoting selected passages to keep you from falling asleep):

“An estimated 2.7 million U.S. adults in 2004 had gross assets of $1.5 million or more. In total, these top wealth holders owned nearly $11.1 trillion in assets.”

“57.0 percent of top wealth holders were men, while just under 1.2 million were women”

“Women’s portfolios contained a greater proportion held in personal residences and publicly traded stock than those of men. Conversely, men’s portfolios were made up of proportionately more closely held stock and business assets. In each wealth and age class, male top wealth holders had a higher ratio of debts to assets than female top wealth holders.”

And, in a spreadsheet from the same page entitled “Top Wealth Holders by State of Residence”:

There are only 1000 people in Alaska and North Dakota who each have over $1.5 million in net worth.

Not surprisingly, there are 428,000 wealth holders (+ $1.5 million) in California and 199,000 wealth holders in D.C.

And, in a spreadsheet from the same page entitled “Top Female Wealth Holders by Age”

There are 303 wealth holders under 50 and 410 between the ages of 50 and 65.

More Sobering Statistics:

You have one chance in 280,000 of being struck with lightning (according to the National Lightning Safety Institute)

You have one chance in 146,107,962 to win the Jackpot in Minnesota’s Powerball (MN state lottery)

You have one chance in 100 of having your tax return examined by the IRS (IRS.gov)

These statistics help you create a profile about developing lifestyle and career goals that can align you with some of America’s wealthiest people:

1. In today’s economy, you need to be a wealthy woman, since the wealthy men’s portfolio is now worth about half of what it was a year ago.
2. And, it wouldn’t hurt to be between the ages of 50 to 65.
3. If you want lots of peers, become an actress and move to California or become a politician and move to D.C. If you want to be one of the wealthiest people in the state, become a hunter or trapper and move to North Dakota or Alaska.

You probably shouldn’t gamble if you want to keep your wealth, and you’re probably okay to be outside when it’s raining. Remember, I’m here to help if you need me.