Tax Season Blues (1 Viewer)

[KurtEP]

As an auditor, you surely know the difference between legally avoiding and evading. For Example, if someone gets a favorable tax treatment because they use LIFO inventory instead of FIFO, that's perfectly legal (at least back when I was auditing). LIFO may be a BS standard by any rational view for most companies, but its use for financial purposes is not illegal or immoral.

The examples you give are, with a few arguable exceptions (trusts, foreign income), illegal.

 

[Carl Miller]

Of course I do, and my error for using avoidance/evasion interchangeably. I did that because I don't see the relevance in drawing a distinction in this proposal. The examples I gave are mostly illegal but they are widely practiced and cannot or should not be ignored or swatted away in this discussion. The reality is that in this country, the line between avoiding and evading is extremely thin and it always has been.

The difference is nothing more (I'm simplifying just for sake of clarity) than a dance between accountants and government where accountants seek to avoid (legally) and government seeks to prevent avoidance by converting such practices into illegal activity/evasion.

Virtually no part of the IR Code has been created without the specific intent to modify, legalize, make illegal or clarifty some aspect of tax reporting (including LIFO) for a variety of reasons.

My response was to the following statement which was called a "myth":

"I tend to agree here -- though conventional wisdom is that the super wealthy avoid more than their fair share of taxes."

Common sense should tell anyone that those who have the resources to hire the best accountants, and those who have the most money at their disposal to utilize are those who are best able to avoid taxes. Surely there is a vast difference between a 200k/year earner getting his taxes prepared by a CPA from KPMG and some 50k/year office manager having an H&R Block trained "tax preparer" whose previous job was delivering pizza 3 months earlier for Dominos. One has more money and a better accountant with a greater knowledge of the IR Code, the other has less money and a tax preparer who wouldn't know what to do with this guys money even if he had more.

Going back to the fine line between avoiding and evading....The reality is today that evading has to a great extent been reduced to a slap on the wrist offense in that the IRS has neither the resources nor the political backing to lower the boom on tax evasion. The fact of the matter is that some doctor or dentist can whittle away $500k in gross receipts on a Schedule C and reduce his net profit all the way down to 30k by inflating his expenses 2x or 3x what they really are and if he gets caught (big if) he's not going to be treated like a tax evader even though he is. He's simply going to pay his deficiency, his penalty and his interest and go home....Then he's going to wait a year or two, and try the whole thing all over again because it is all nothing more than a calculated risk.

My entire reason for responding, and responding as I did is that the statement I quoted above is by no means a myth, nor can the current methods used to both avoid and evade taxes be ignored in this discussion because the frequency of both being committed by the wealthy (and evasion by the poor) places the middle class at an undeniable risk of being treated unfairly in this proposed system where tax rate is tied to voting power.

So take the above mentioned dentist and office manager and tell me which of the two is going to have a greater ability to avoid taxes, and which will have a greater ability to evade taxes? When you put this all together into this proposal of tying voting power to tax rate, assuming the wealthy person doesn't get caught, who benefits unfairly?

 

[KurtEP]

In the context of the argument above, though, wouldn't the Dentist in question suffer the indignity of losing some of his voting power by reducing his income from $500,000 to $30,000?

You can certainly argue that the middle class gets the shaft in a lot of cases with the current structure of taxes. The wealthy definitely have better tax planning opportunities. Of course, you can also argue that they should get a bigger chunk of the tax liability. They certainly use more services, including things like social security, than the very wealthy (I'm aware of some of the counter arguments, too, but I think they're thin so I won't go into them).

What bothers me about all of this is the first part of your argument, which is certainly correct from my experience. If someone comes up with a legitimate way to avoid taxes, the Treasury department immediately tries to legislate it away. As a result, we have a bizarrely byzantine tax structure that probably makes the incentive to play around even greater. How many people do you think truly understand parts of the code like partnership taxation, for example?

 

[Carl Miller]

Assuming he gets caught, the dentist would definitely suffer the indignity of losing voting power...Something I didn't consider until you mentioned this is that maybe potential indignity would even dissuade him from evading at all, or doing it again if he were caught? I don't know. The indignity of having less voting power than one's peers might have a greater impact than any financial impact resulting from the loss of voting power.

I do agree with you about the gov't legislating away what seems to be nearly everything and I certainly agree with your description of it being a byzantine tax structure.

In my opinion, the blame is a shared one because it's a chicken and egg type scenario. Which came first: A) the silly-defies-all-common-sense attempt to avoid tax based on something the code didn't say or didn't e-x-a-c-t-l-y say you couldn't do? B) the silly no-one-on-this-earth-could-ever-possibly-understand code that exists? Or C) The responses to A which almost always closely resemble B?

To me, sometimes the code is simply inherently impossible to comprehend and there's an honest attempt to interpret it for the benefit of clients by practitioners which gov't eventually legislates away if it can, sometimes with no basis in fairness.

At the same time, there are also flagrant attempts to challenge the code which defy all logic and common sense where practitioners go too far and change the meaning of words which really have no alternate meanings.

The end result of it all is that the code just grows and becomes more complex and more mystifying every year. It's a self defeating dance that results in inequitable treatment to probably 75-80% of the taxpaying public...including the wealthy.

 

[DaveF]

As I explained earlier, this doesn't make any practical sense to me. Higher income results in higher tax rates in our progressive tax system. If you want a flat tax system, advocate it; this is the wrong method to get there, IMO. And as for people purposefully adjusting their tax rates to get more votes -- the wealthy still win. Practically, my hypothetical teacher can't afford to pay at the highest marginal rates the rich basketball player can. In your system, the rich can literally buy their votes.

We're stuck in an failed explanatory loop. Do you propose people can select their amount of taxes paid to select how many votes they have?

How can this practically work? The rich could always out buy and so out-vote the lower earners. They can pay more in taxes than everyone else even earns. Unless the wealthy decide to screw voting and keep all their money, and the lower-middle class decides to live in poverty and spend all their cash on votes, the obvious result is that voting is tied directly, consistently, to income.

And so the wealthy are greater citizens. How is what you're suggesting not going to result in this?

 

[Chris Lockwood]

> If too many people are stuck in the lowest tax bracket, that's society's failing,

Nope, it's their "failing". Let's get off blaming "society" for what individual's do.

 

[Dennis Nicholls]

I wonder if anyone remembers how we got into this "withholding" mess in the first place.....

I actually investigated this. It was during WWII. Prior to this, you just sent in a check each April for the previous year's tax levy. No withholding: no quarterly filing. The government realized that they could "double dip" on taxes for a year if they both collected from the previous year AND collected for the present year in "real time". IIRC it was 1943. And somehow after the war they never backed out the withholding scheme. :rolleyes

 

[KurtEP]

From a practical standpoint, the withholding is really not a mess. It would be awkward from a cash flow standpoint for the US to get all of its money on one day each year (or over a few months, as the case may be). Also, if everyone were to send in a check individually each week, it would increase the administrative costs tremendously, just in terms of handling the checks.

That said, I agree with the sentiment that people should have to cut a check. I'd also prefer getting rid of all hidden taxes, such as corporate income taxes and payroll taxes paid by employers. They may raise needed revenue, but they also hide the tax burden from the citizens. The average person is simply not aware that corporate income taxes filters down to him one way or another, and have no idea what payroll taxes are actually paid. Without knowing that, there is no way for them to really judge their tax burden and vote effectively.

Of course, having said that, most people probably vote based on far more idiotic non-issues, such as how many babies the guy kissed on the campaign trail, so it's probably a lost cause anyway.

 

[Joseph S]

I already have State #1's refund in less than 36 hours.

Now back to the blues...

 

[DaveF]

I'm with ya on this one.

Moreover, it would be better finances: If I could keep my taxes throughout the year, invested and earning interest/dividends, I'd have even more cash even after paying the IRS...

But still, taxes are apparent: each week I get a paystub with it very clearly indicated how much I paid in taxes this period (ouch) and how much I've paid YTD (ouch OUCH!)

I think the IRS should be required to mail each taxpayer a simple note stating, "Thank you for the $XX,XXX you paid this year. It will buy one landing wheel for a single F-22 Raptor."

 

[Brian Perry]

Anyone trying to e-file with TurboTax right now to beat the deadline? It appears their servers are all hosed...

 

[LanceJ]

Just a quick off-topic addition to this discussion (from here):

 

[Eric_L]

And where do you think corporations find the money to pay their taxes? (Hint: It is not the rich CEO who pays them) As far as I'm concerned coprorations could pay 0% and it would be fair so long as the income were fully distributed - which is the tricky part.

(edit: and taxed at ordinary rates barring any other taxes)

 

[Eric_L]

As you already seem to have learned - that is a dangerous argument to make around here. Not to mention that work experience does not hold much water here. How seriously would you take my advice on selecting a HT if I told you I was a manager at Circuit City for 10 years so therefore I know more about it than anyone here? (Not to disprespect either profession) Also you really don't know everyone elses profession - including mine so a blanket statement is quite risky.

I stand by my statement that the examples you gave are flawed. I appreciate that you acknowledge the wealthy currently pay a greater proportion of their income to federal taxes.

I've also noticed that many folks here are confusing individual taxes with institutional (most often corporate) taxes. There we begin to tread on unstable ground. Most closely held C Corporation owners pay tax twice; Once on personal income and once on dividends. THey also pay tax on excess retained earnings. Heaven help them if they are a service business. There are some tax-reduction strategies for those C-Corp owners that are unavailable to non-C-corp owners; but they have limits and only affect the dividend portion of their income - which is taxed twice - potentially meaning a substantially higher allocation of their income is confiscated for tax that the highest marginal tax rate. Publicly held corporation are even more abstracted from this conversation since the shareholder incomes can vary substantially.

As was correctly pointed out - one perk of a voting allocation based on tax rate is the disincentive to evade (vs avoid) taxes.

The other point which provides validity is cost. When the US votes to raise taxes on the wealthy the cost to the wealthy is apparent. But what is the cost to everyone else? What is the maximum threshold the wealthy should be forced to pay? Without cost to everyone that threshold is indefinable. However if there is a balanced 'cost' (in the form of increased representation) for disproportionately taxing our citizens then a fair level can be determined. If that is a flat tax then so be it, but let the people decide if it is worth the cost. The current system - where tax increases have little to no consequence on most people is flawed. A flat tax may be desirable but give people the option of a progressive tax system - but not without fair consequences.

I reject the assumption that progressive taxes are paid most by the people most able to pay them. It is a straw man. These people paying the taxes do not get a representative say in how it is spent - a VERY important consideration. (Imagine if every time you got gas you had to pay for everyone there and they all got to vote on how much you were going to buy and who's tank it would go in! Hey! You're most able to afford it you rich bastard!) The majority of people who set these excessive tax rates so high have nothing at stake in setting them there. In the past it would have resulted in tea being poured into a harbor - but alas environmental regulations prohibit this today. Bring back equal representation for taxpayers.

Everyone can afford to pay tax - and doing so is a duty of citizenship. Even the poor should be expected to contribute- even if only a token amount. Taxation is a duty and an honor of citizenship which should not be denied them.

Oh - and regarding tax collecting by the government being to difficult to administer without witholding; Poppycock! (omfg - I just said "poppycock") A substantial number of taxpayers already pay quarterly - it is nothing new and the mechanisms are already there. Besides - so what if it is a little more difficult for the IRS - the benefits far outweigh the costs.

 

[KurtEP]

Even if they paid quarterly, you'd still be faced with an increased administrative burden on the part of the IRS. The vast majority of the people in the US pay via withholdings at the company level. Granted, these are weekly or twice monthly or some such, but they usually cover a number of people, ranging from two or three to thousands. All of that burden would be disbursed to the government for collection. This would be drastically in excess of the number of people paying quarterly now, and would require increased staff, and of course taxes to cover it. Not material in the grand scheme of things, but it would be there anyway.

As to the benefits outweighing the costs, I don't know. I've long espoused the idea that taxes should be paid directly, but I fear that this is one of those ideas that's better in theory than in practice. I'd guess that there would be far more defaults and tax problems among the irresponsible. Plus, there might be more incentive for people to live off of the grid, unless the government enforced a 1099 type regime. It would be an interesting experiment, but I'd bet the vast majority of people would far rather have things the way they are now, lumps and all.

 

[Carl Miller]

And I stand by statement though I do acknowledge that I erroneously used avoid and evade together without differentiating though my point remains the same as it relates to what you're proposing.

Regarding the rest about mentioning careers and what have you...I find nothing "risky" in doing so. I did not mention my profession to assert that I have superior knowledge over you or anyone else. That you made this assumption is your own error in judgement.

I think discussion can benefit greatly from people sharing their experiences, but that's simply my opinion as a person who entered this thread for the purpose of discussion, rather than one who is interested in "winning" an argument.

Winning an argument on an internet forum simply isn't that important to me and I find your comments about 'dangerous arguments' and risky statements to be a little, uh, amusing.

Lighten up man....I mentioned my profession on an internet forum but you know what? I'm still alive.

 

[KurtEP]

Actually, I don't really "get" the thing about experience not being that important. Clearly it depends on what your experience is, but if you're honest about it, I'll take it at face value. My first experience with message boards came with martial arts boards, where you have tons of loud mouthed, inexperienced kids trying to tell people vastly their superior how to fight. That probably gives me a different perspective.

 

[Carl Miller]

That's my perspective as well. Like you, I've experienced plenty of people on NG's and forums who make statements about their profession to say 'I'm the expert here' in order to win some argument or claim superiority. I've seen this often enough in fact to fully understand why my doing so anywhere might lead someone to think I'm one of those people.

However, I view this forum as a place where one might do a bit more than pontificate, and instead share a little experience so one knows how and why another person has come to hold the perspective and opinions that they do. Discussion is more interesting that way, to me.

 

[KurtEP]

I agree. I get into these discussions just for the fun of perhaps learning something. It's helpful to know if someone actually knows something or is just another yahoo. Knowing you had significant experience in audit gave me a very different outlook on your posts. I typically hold back on my background, just because it looks better than it is sometimes. I'm an expert in a very narrow field of auditing (ABL stuff), but I've been out of it for a while. I'm also completing my ninth year of college, so I actually know a few things, but it's all academic

 

[Carl Miller]

Same here Kurt. I'm not particularly overjoyed with my background (though I am proud to have been a gov't employee for 20 years so far without losing my mind ) because I'm not an accountant and that was the goal when I graduated college. My work is geared so completely around interpreting IR Code that I'm quite a ways removed from accounting concepts and actual accounting work.

At 42, I've got another 5 years minimum to go before the option of being able to start a second career becomes a reality. I do plan on doing something else, though I'm not sure what, once I hit either 25 or 30 years.

What are you studying now?