In zombie movies, the dead rise from the graves and shuffle around the neighborhood looking to feast on human flesh. This past year, life imitated art (and I use the term “art” loosely), and the dead rose to file tax forms.
Yes, you read that correctly. This past year, 16 accountants in the Bronx and Manhattan were charged with filing numerous income tax returns of a dubious nature. These tax returns included making claims on dependents that were not actually dependent (or even related), and filing the tax forms of deceased people to get tax credits.
Fortunately, they were caught by undercover IRS agents who recorded these accountants offering a variety of illegal services.
This is truly a frustrating news story for me because it makes it harder for regular, honest, tax-paying citizens like you and I to get the tax solutions we deserve to our tax problems. For the 16 who were caught, I imagine far more have gone unnoticed and our current “redistribution of wealth” system is taking money from hard workers and funneling to people who would rather file tax returns for dead people than do real work.
Adam Smith wrote the book “The Wealth of Nations”, a massive work that set the tone for employment, economics, and industrialization in the US. Published in 1776, much of Smith’s work is as relevant today as it was back then.
Among his many insightful economic positions, he believed that taxes were a good thing but they should be “certain, and not arbitrary”.
No one here disputes that we shouldn’t have taxes. Taxes are necessary to pay for roads and police and the many other services that come with living in the US. But what we do have a problem with is that the tax code has become a tool to redistribute wealth, taking it from some and giving it to others, ultimately redefining the American Dream into something that looks more like a socialist economy.
Adam Smith believed that taxes should be “certain, not arbitrary” but our taxes right now are anything but certain! Filling out tax forms – accomplished by wading through an overwhelming number of forms and documents – is akin to pulling the lever on a slot machine… but a slot machine that punishes you instead of rewards you!
Smith proposed a flat tax. While I realize that there are many challenges to implementing a flat tax, and there are reasons why a flat tax might not work, it is the most equitable form of taxation because it is certain and knowable. In fact, a flat tax might actually decrease the amount of bureaucracy and expense incurred by the IRS every single year in trying to understand their own tax code and then trying to enforce it.
The Washington Times has a fascinating article that starts by talking about the IRS and how IRS employees are receiving a growing number of threats for trying to enforce Congress’ tax laws but then, on page 2 of the article, it launches into a scathing examination of IRS employee culpability and ultimately concludes with other great thoughts by Adam Smith. Read the full article here.
In a recent blog post I highlighted the BusinessWeek article about the IRS asking for businesses to self-identify the areas where the IRS might disagree with them. If this rule change goes through, businesses will need to create a “roadmap” of the line items the IRS should consider auditing. More galling is the fact that businesses will also be required to list the full amount they would owe if the IRS decides against them.
This really frustrates me and I’ve decided to continue blogging about it today. I think this is a disaster just waiting to happen. Here’s why:
It hurts honest people more than dishonest people. This is yet another way for the IRS to go after honest people. After all, if the statistic is true which says that over 16% of Americans evade taxes, those folks are certainly not going to be the ones who will accurately report their numbers. It’s the honest ones who accurately report their numbers who will suffer while tax evaders and tax cheats continue to get away with it.
This heavy-handed “self-audit” program will increase the number of tax cheats. With a confusing and oppressive tax code, it’s not a surprise that cheating on taxes is a temptation for some. With this new rule, even fewer people will feel motivated to tell the truth. Once again, it punishes the honest, or further tempts them to be dishonest.
It’s self-incriminating. Even if someone is filing their income tax honestly, these numbers invite scrutiny which can lead to additional audits. It’s an invitation for oppressive income tax auditors to zero in on a few areas of concern.
As I’ve mentioned before, this assault is focused only on businesses – right now – but if it’s successful (“successful” in the eyes of the IRS, that is), I believe individuals will eventually be forced to perform a similar type of tax filing.
Let’s call it what it is: It’s double tax filing: One is the tax you don’t want to pay but feel is accurate. The other is the higher tax that you don’t want to pay but will have to pay if the IRS decides in their own favor.
And that leads me to another issue: The IRS gets to create these rules and gets to enforce them as well. There are no checks and balances here!
Instead, the IRS should actively pursue tax cheats and tax evaders who are getting away with billions of dollars in unpaid taxes. They should leave honest, hard-working Americans with as much of their hard-earned money as possible.
People are in for a wake-up call: Non-profit organizations (excluding churches) that report less than $25,000 in income in 2010 might discover in 2011 that the donations they received through 2010 were not tax exempt.
Here’s what’s happening: The IRS is requiring non-profit organizations (except for churches) whose reported income is less than $25,000 to fill out an additional form. The due-date for that form was the middle of May but nearly 214,000 non-profits had not filled out the form.
No one will realize their error and they will continue taking donations through the year. Then, when it comes time to issue donation receipts, here’s what will happen:
The organization will discover that it has lost its non-profit status and the generous donations throughout the year will not be tax deductible.
The organization itself will have to report for-profit income, which could be financially devastating to the organization. Meanwhile, the people who have given throughout the year with the full expectation of the tax-deductible benefits of their donation will suddenly discover that they paid money and are receiving no tax deduction in return.
Here is another occasion where the IRS is biting the hand that feeds it. In an attempt to collect every dollar it feels it is owed (and to leave no stone unturned to find more of those “owed” dollars), it will leave in its wake many important organizations that will no longer be able to function, including historical societies, community theater, and community outreach programs. That’s right, the IRS isn’t going after tax cheats, they’re trying to squeeze money from organizations that can barely afford to survive.
In a recent article by Robert Samuelson at RealClearPolitics.com called “How Big a Government Do We Want?“, Samuelson talks about a proposed Value-Added Tax (VAT) which its proponents suggest would relieve the US of its disproportionate tax burden and help to pay the deficit.
While a sales tax SEEMS like a good way to redistribute taxes to everyone who buys (instead of charging higher income taxes to people who earn more money), it is not a good solution. Implementing a VAT is complicated and, as Samuelson suggests, will only increase government.
And that is what concerns me more. Of course I don’t want higher taxes, but a bigger government is even more worrisome – because they create unnecessary spending (case in point: More of our income taxes go towards the federal pension than to education).
What’s the perfect size of government? I want it to be no larger than it was approximately 100 years ago. It want it small, the way it was before the big government era when we thought “the bigger, the better.”
Here’s why: The government is killing us while it benevolently attempts to provide us with a cradle-to-grave safety net:
It’s killing us with taxes
It’s killing our spirit of independence and non-government dependence
It’s killing our “can-do” spirit
The US was founded on liberty and opportunity and both of those things are quickly disappearing as we become overtaxed and then enslaved to debt.
Large groups of Americans now wait eagerly for their government check:
Farmers
Corporations
Earned Income Credit recipients
Seniors who obtain more in benefits/insurance value than their tax contributions would have ever bought on the open market
The government, through its hand-outs, is creating class warfare, age warfare, and warfare between small business and large business.
Those that earn more are encouraged to dislike those that earn less.
Those that earn less are encouraged to be suspicious of those that earn more.
Those that are older are encouraged to be hyper sensitive to younger folks who don’t want to pay for their benefits.
Those that are younger are beginning to begrudge the payments they must make to seniors who are better off than they are, or already have their homes paid off, while they also receive extra tax deductions, and in some instances may be excluded from paying property tax on the local level.
Small businesses looks askance at corporate welfare.
Large businesses seek to gain preferential tax treatment over smaller competitors.
Everyone SAYS they don’t like taxes and big government, but they’ve already been “bought”. They want everybody else’s government check be reduced or stopped – but they don’t want their government benefits or preferential treatment touched.
Do we have the guts to have a smaller government? Do we have the will to fight for reduced government that may actually cause our own governmental benefits to be cut? As I survey the present landscape, I don’t see much reason to be optimistic.
When you don’t pay your taxes, the IRS is on you like ants to a picnic. I know that because everyday I work with people whose tax problems are exacerbated by strong arm IRS tax collection techniques.
But what about people who overpay their taxes? It might seem hard to believe but the IRS had $1.3 billion sitting owed to 1.4 million people who did not file a tax return for tax year 2006. (You can read more about it at this IRS press release). This outstanding amount owed back to taxpayers happens because someone might pre-pay their tax based on quarterly estimates but then they fail to file a tax return at tax filing time.
The problem is, if you didn’t file your income tax within three years you generally forfeit your right to receive that refund. That means the money will not be leaving the U.S. Treasury, and Congress will be able spend it for its many “important” projects.
It doesn’t seem fair does it. The IRS gets a much longer time period to collect any money you owe them, but you get a much shorter time period to collect money from the the IRS that they owe you.
I guess Congress, who makes up these screwy rules thinks it’s fair, but that because it benefits them.
They fix the rules in their favor.
I came across this interesting study done on the behalf of the IRS Oversight Board. The study asked participants if they felt it was okay to cheat on their taxes. The study itself has been done since 2002 and over the years, the range of people who feel that it is completely unacceptable to cheat on their taxes usually fluctuates between 84% and 86%. In 2009, 84% of respondents said it was unacceptable to cheat on their taxes.
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.
Last year’s so-called “Great Recession” wreaked havoc on a number of economic fronts and its effects are still being felt today during tax time.
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.
Americans face 4 very different kinds of stresses during tax season. I call them the “April 14 stress”, “April 15 stress”, “April 16 stress”, and “April 17 stress”.
April 14 tax stress
In the weeks and months leading up to the April 15 tax deadline, you (and most other Americans) will be facing the stress of tax preparation. There’s the effort of gathering paperwork, pouring through difficult-to-understand tax forms, juggling paper and a calculator, and hoping desperately that you don’t have to pay taxes this year. The stress comes from finding the time to do taxes and then from trying to figure out each separate line in your tax return.
April 15 tax stress
No sooner is that stress over then the next stressor appears: April 15 is tax deadline day. Most Americans just barely squeak their tax returns in on time and the stress of trying to get it done and rushing through those last minute calculations feels rushed. Did you get everything? What if you didn’t do something correctly? You vow to do your taxes earlier next year (but who has the time?)
April 16 tax stress
Fortunately, not everyone feels this stress, but many people do. If you owe tax and you have to pay it, guess what: your bank account may be drained on this day to cover the check you wrote for your taxes. That’s stressful as you watch your tiny nest egg now devoured. Goodbye to that new sofabed you were hoping for.
April 17 tax stress
Have you ever played roulette and hoped desperately that the ball lands on your number? April 17 tax stress is the opposite: It’s audit stress. You hope desperate that you don’t get picked for the probing and invasive procedure known as the tax audit. And realistically, this stress doesn’t go away on April 18; it hangs over us like a cloud every single day.
If you’re facing these stresses, you’ll find some good advice for handling the April 14 and April 17 tax stress in this article at CNN Money called “A guide to avoid an IRS tax audit“. And if you want to avoid the April 16 stress, give our office a call.
Comedian Jerry Seinfeld gives us a glimpse into his own IRS tax audit on this stand-up sketch, which appears at the end of a Seinfeld episode.
He’s right: tax audits are not pleasant. Watch the video for a lighthearted take on tax audits:
While you or I can do nothing to completely remove the chance we won’t someday be audited, there are some basic things we can do to make the process less painful, and less costly.
A basic tip, that many folks ignore, is to keep very good records to document any business expenses or home deductions.
What do I mean by “good” records? I mean that they should be complete and well organized. While this may sound simple, it actually takes real effort. This is a task none of us want to do, but it’s best if we do it anyway.
This is another one of the “joys” of being a taxpayer. Thanks IRS!
In zombie movies, the dead rise from the graves and shuffle around the neighborhood looking to feast on human flesh. This past year, life imitated art (and I use the term “art” loosely), and the dead rose to file tax forms.
