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Kerstetter Letter®
Issue 98-2
Summer 1998
© 1/30/99 by Kerry
M. Kerstetter, MBA~CPA~ATP~ATA
This is the
complete text from the Summer issue of the Kerstetter Letter. Annual (four quarterly issues) subscriptions
to the blue-paper printed version, including all of the hilarious cartoons and
animal pictures, is available by mailing or faxing a check for $19.95 to
Kerstetter Letter, 11802 Deer Road, Harrison, AR 72601-6550 Fax:
1-800-839-3008
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At the beginning of May, IRS released the results of another of its super precise scientific analyses of the tax gap; the amount of uncollected federal taxes each year in this country. This gap, blamed on noncompliance by American taxpayers, is now pegged at $195 billion per year; almost twice as much as earlier calculations. As with all statistics released by the federal government, this one has been accepted as unbiased gospel and promulgated as such by everyone in the media, including the Wall Street Journal. Knowing full well that this number was pulled out of thin air for the sole reason of allowing IRS more power to terrorize Americans, I dug into the source for this figure. My training in the old-style of journalism, not currently practiced in the mainstream media, was almost identical to my training in financial auditing. Basically, all facts should be independently verified from unbiased sources and self serving statements should be reviewed with even more skepticism. Why nobody in the mainstream press connected this timely statistic with the current debates over curtailing IRS’s powers is just another example of their inability to do their job properly. (Actually, it is either an example of incompetence or collusion with the IRS.)
I would like to offer an alternative view of the
widely discussed tax gap of $195 billion.
As a professional tax practitioner, I have always had difficulty
understanding how the government could so accurately calculate the volume of
the underground economy because, by definition, it is unmeasurable. The recent IRS release of its latest
calculation of the amount of unpaid taxes, and its widespread dissemination
through the media, motivated me to do a little more digging into this matter. I even spoke with IRS’s official spokesman
in Washington, Larry Blevins.
Calculation – Mr. Blevins confirmed that the $195 billion
figure is merely an extrapolation of results from a 1992 IRS study that was
based on 1988 figures. When I asked him
if there was any correlation done with income figures from other sources, such
as W-2s and 1099s, he said that there wasn’t.
Tax Cheats – The assumptions inherent in the IRS
extrapolation are many. First is the
starting point of most IRS assumptions; that everyone is a tax cheater. Next is the assumption that if something
like 20% of the potential taxes went uncollected in 1988, that same percentage
was uncollected for 1997. With the much
more robust economy in 1997, that number would be much higher. I realize that the concept of inserting the
real world into this discussion is a novel concept, but I can’t resist bringing
out an alternative to the ivory tower Washington perspective. I work with literally thousands of real life
taxpayers; so I feel qualified to make the following conclusions.
Contrary to popular opinion
that everyone is a tax cheater at heart and only pays because of the fear of
IRS repercussions, I find the opposite to be true. I find that most people are actually too honest when it comes to
computing their taxes. Most people
don’t claim all of the deductions to which they are entitled. This is based on ignorance of the complex
tax laws, as well as a tendency to self censor if they don’t have absolutely
perfect documentation. I have to
explain that there are alternative ways to reconstruct expenses that are as
acceptable to IRS as receipts and cancelled checks.
Same Percentage – It’s fairly accepted
knowledge that much of the increased income last year was earned by investors
and executives in successful companies.
To assume that these people are under-reporting their income is just
plain wrong. These people do report
their income accurately and pay their fair share of taxes. People selling drugs or things at flea
markets may very well be underpaying their taxes; but to conclude that their
incomes have risen as much as the new tax gap is a stretch. My experience at flea markets and craft
shows, with more and more vendors accepting credit cards, indicates that the
volume of untraceable cash commerce is actually decreasing.
Timing – What makes the IRS’s figure even more suspicious
is the timing of its release. Congress
is debating, and may very likely pass, some kind of legislation curtailing some
of IRS’s power to squeeze money out of people.
Is it a coincidence that out comes an official statement that each
person is paying $1,600 more in taxes because of tax cheating? If this isn’t an argument for more IRS
power, I don’t know what is. Mr.
Blevins used that $1,600 per person figure with me as well.
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Those of you who have been with me for a few years know that I reveal more inside tricks of playing the tax game than anyone around. However, I have always been open about the fact that there are some tricks of the trade that are simply too dangerous to put into print. I know that this newsletter does reach folks at the IRS. If I were to tell some of the methods used in our clients’ battle with the enemy, it would undermine our ability to use them because frankly, we do often exploit some of the weaknesses in the IRS’s armor that could be easily plugged up if they were to learn about them. Incompetence in government bureaucracies does have its advantages.
What I am about to discuss is not new, but I am just now feeling confident putting it into print because I have discussed it openly in speeches and seminars with IRS agents and bankers in attendance. Having suffered no adverse reaction, here goes.
When your income tax return is being prepared, it needs to tell a certain story of your past year’s financial performance. Exactly what story you want depends on the intended audience for the tax return. The two main audiences are the IRS and lenders in conjunction with loan applications. Other users of your tax returns will include courts in child support and divorce negotiations, as well as potential buyers of your business.
For most people who believe in using the tax laws to minimize their tax obligations, the objective is to give the appearance of poverty; that you’re barely scraping by. As I have mentioned before, if you are showing very low or negative net income, it’s a good idea to add some description of how you survived during the year. While such disclosure is not required, nor even possible with electronic filing, it’s dangerous not to include it. IRS has a mindset that everyone is a tax cheat and that anyone showing negative or very low income on their tax return must have some kind of unreported taxable income on which they survive. There are all kinds of non-taxable (and non-reportable) sources of funds that could very likely be what kept you out of bankruptcy. Some common examples are gifts, inheritances, insurance benefits, new loans taken out, as well as notes receivable that have been paid off. IRS has no way of knowing about any of these unless you tell them.
Banks and other lenders are very open with the fact that they only want to loan money to people who can prove that they don’t need it. You need to submit documentation proving that you earn so much money that the only reason you are borrowing from this lender is out of the kindness of your heart. I have spoken to several banking organizations over the years, so I’m not being disrespectful to disclose that they describe themselves as people who would only loan you an umbrella if it’s not raining.
So here’s your dilemma. You want to buy a new home or refinance your current mortgage. Most of your income is from your own business. How can you have your tax return prepared so that you pay as little in taxes as legally required, yet still prove to the banker that you are independently wealthy? In the old days, we handled this problem by preparing two versions of the tax return -- one for IRS and one for the lender -- with different income figures. This tactic has become very dangerous because of abuse in the past. Some lenders now require borrowers to sign a form allowing IRS to send the lender a copy of the return it received. Some prosecutors are also bringing bank fraud charges against people who submit knowingly false loan application data, such as phony tax returns. In recent years, IRS agents have been obtaining copies of loan applications and using the inflated figures as proof of tax fraud because they are so much higher than the income reflected on the tax return. This puts the taxpayer/borrower in a no-win position. Most of the time, the tax return is the more accurate reflection of the person’s finances, and the numbers were artificially inflated for the lender’s benefit. This puts the person in the precarious position of having to admit to tax fraud or bank fraud.
So, how do we accomplish both goals without opening ourselves up to that potential crisis? The solution I have been using is to prepare the tax return like H & R Blockheads or one of the other IRS-leaning preparers would. Basically, we go light on the deductions in order to show a high net income. This return is filed with IRS, so that it can be verified by the lender. After the loan has been approved and funded, we prepare an amended return in my normal style, claiming every imaginable deduction available to reduce the bottom line. The only real problem this has is the need to front money to IRS. The good side to this is that IRS does pay 7% interest on refunds from amended returns. I have also had situations where the clients didn’t have to actually front any money to IRS. They filed their high income returns, with balances due, and used them for their loan applications. Later, when I prepared the amended returns, the outstanding tax bill was cancelled out.
I realize that to many people what I am discussing may sound like crossing the line into unethical territory. Those of you who have never been fully self employed and have had no problem obtaining a loan with a pay-stub and W-2 don’t know how difficult it can be to qualify for a loan. As I mentioned at the beginning, I have openly discussed this in many of my seminars and speeches with lenders in the audience. I would have been nailed by now if indeed I had gone too far.
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Here’s another tip for dealing with IRS auditors. One obstacle to convincing an IRS auditor of the validity of deductions for self employed people is the simple fact that they think everyone’s working world is just like theirs. Since they can’t deduct such things as their auto, travel and meal expenses, they often have a chip on their shoulder when they see other folks claiming those deductions. I often find it helpful to explain to the auditors how things are in the real world of the self employed. Following are just a few of the contrasts between an IRS employee’s work world and the one in which most of us reside. How does your work world compare to the IRS’s?
Everyone works no more than 40 hours per week, from 8am until 5pm Monday thru Friday. Any more than 40 hours is paid at time and a half or double time. Weekends and evenings are leisure time.
Every possible holiday is time off from work with full pay.
The paycheck comes in like clockwork every two weeks.
If the employee doesn’t feel good, s/he can just call in sick and still be paid for that day.
Tax free benefit paid by the employer.
Two to several weeks of paid time off each year.
Very lucrative retirement benefits completely paid by the employer regardless of work ability or performance.
Cost of living adjustments (COLA) every year to keep pace with the general inflation rate. No connection to work performance.
Stick around long enough and you’ll eventually be promoted.
Seniority rules. Cannot be fired for any reason whatsoever, especially for incompetence or mistreating of anyone else. Can go postal (a.k.a. shooting everyone at your work site) and be confident that you still have a job with full benefits. There is no chance of your employer ever going out of business or downsizing.
I know that some of you reading this work for the government and may feel that I am picking on you here. That is not my objective. I also know that there are several exceptions to the stereotype of the typical government employee who is dumber than dirt and only works for the government because they wouldn’t survive in a real private industry position. The reason it is important to explain to auditors the self employed world is that a lot of the deductions we claim do sound suspicious when evaluated from the perspective of the civil service world.
There are some tests for qualifying deductions based on the number of hours involved in certain activities, such as managing rental properties. The trigger number is often something like 500 hours per year, which is intended to be one quarter of a “normal” 2,000 hour work year (40 hours/week X 50 weeks). I have seen auditors act totally incredulous that a taxpayer was claiming to have worked the necessary 500 hours plus 3,000 hours in their main business and another 1,000 hours in another business. Some auditors believe that it is physically impossible for a single human being to work more than 2,000 hours per year. With the issue of how much a vehicle is used for business, especially when we claim 90-100%, they can’t believe that the taxpayer didn’t take a lot of vacation and leisure travel trips in their non-working hours. To those of us who routinely put in 100+ hours a week and can’t even remember the last time we had a real vacation, these concepts sound ridiculous. However, the reality is that people with those beliefs are the ones passing judgement on the validity of your tax returns.
Depending on how well the auditor is grasping the concept of self employment, I sometimes also illustrate how much people make per hour. For example, real estate agents seem to be making so much money. IRS auditors earning $20,000 to $40,000 are very resentful towards someone who may have received $100,000 last year in commissions. However, when I explain all of the running around real estate agents have to do, and the fact that their entire pay structure is nothing more than a gamble that a deal will be consummated, the big money doesn’t seem as lucrative. When you divide the net income (sometimes even the gross) of most real estate agents by the total number of hours they worked on deals that closed and those that didn’t, they are usually earning much less than the government’s mandated minimum wage. They would net out better flipping burgers at McDonald’s.
Every business and every business person are unique in the
exact ways in which they conduct their business affairs. If IRS is reviewing your tax return,
explaining your personal M.O. before you start will grease the wheels in
getting more of your deductions accepted without as many questions or as nasty
an attitude.
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I have been encountering a lot of misinformation in regard to estimated tax payments. Many people believe that you have to submit a payment and voucher every quarter or you will be penalized. Many also believe that you have to stick with the originally computed payments, even if things change during the year.
In spite of calls for allowing everyone to pay their income taxes with a check on April 15, we do have what the IRS likes to call a “pay as you go” tax system. This approach of having taxes withheld at the source or paid in quarterly installments during the year does hide the full tax cost for most people. While a check each April 15 would definitely drive home the actual tax cost, I’m afraid that people are such lousy planners and savers that few would have enough money on April 15.
With estimated taxes, technically, each person is supposed to compute his/her income taxes five times each year (i.e. for 1998: 4/15/98, 6/15/98, 9/15/98, 1/15/99 and 4/15/99) and send IRS an appropriate amount of money each time. If not enough is paid in for each installment, IRS can penalize. Of course the typical double standard applies here. There is no reward (i.e. interest) for paying in too much. Realistically, it’s difficult enough getting people to compute their taxes once a year, so IRS has what they call safe harbor methods of figuring an appropriate amount of taxes to pay in during the year without risk of penalty. The standard safe harbors are to pay in during the current year:
· At least 100% of last year’s total tax (income, self employment, excise), or
· At least 90% of the current year’s actual total tax
Since the first figure is more easily determined, most people opt for paying in 100% of last year’s tax; what’s often called the Look-Back Method. However, what if you have every reason to expect this year’s tax to be much less than last year’s? Maybe you had a big once in a lifetime capital gain last year that cost you more in taxes than you can ever expect to pay again. Do you still have to pay in 100% of last year’s taxes for this year’s estimates? Since you will just be getting much of that money back when you file your tax return, the answer is no. Normally, it’s only a good idea to use the look-back method if you expect your current year’s taxes to be equal to or higher than last year’s. If your taxes are going to be lower, it’s worth the hassle to do some number crunching to calculate what your taxes will be. It would be a big waste to pay in thousands of extra tax dollars for a zero interest loan to the feds.
Next comes the issue of timing of the payments. Do you have to make four equal payments? You do if your income is earned consistently during the year. For most self employed people, especially those who are commission based, such as real estate agents, the idea of a consistent steady income stream is laughable. If your income is earned in uneven amounts, you are allowed to adjust the estimated tax payments accordingly What I have had good success with is adding the annualized income worksheet to IRS’s Form 2210 for the underpayment penalty and showing that most of the taxable income was earned during the last half or last quarter of the year. This allows the taxpayer to make most or all of the estimated tax payments in the last one or two quarters without any penalty.
Another safe harbor: If you expect your 1998 federal tax to be less than $1,000, you won’t be penalized for not paying anything in during the year.
Part of the practice of what I call “Mean Testing,”
where people earning too much money are penalized (punished), used to require
those evil rich folks to pay in more than the not so evil. If their prior year’s adjusted gross income
(AGI) was over $150,000, they were required to pay in at least 110% of the prior
year’s tax in order to be penalty proof, not just 100% as it’s been for
everyone else. In what is the first
repeal of a mean test, that special rule was removed for 1998 estimates. I wish I could say this is the start of a
trend to treat everyone fairly, but the “soak the rich” hysteria in this
country show no signs of diminishing.
The use of envy and class warfare, pitting the masses against the evil
rich, is the most successful formula for politicians, who while are themselves
in the upper echelon of income, have conned enough people that they give a
rat’s rear end about others.
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As was inevitable, the feds have announced their
miraculous plans to “fix” the Social Security system by extending the
retirement age to 70. They are hoping
enough people die off before reaching 70 to save the need to pay out hundreds
of billions of dollars. This isn’t a
new concept considering that the original retirement age of 65 was established
back in the 1930s when the average life expectancy in this country was 59.
For those of you who are certain that you’ll live
well past 70, and that the feds won’t stiff you for having too much (mean
testing), you can continue to pay in thousands of dollars every year. For those of you who would prefer to invest
that money on your own, there are still plenty of ways to use corporations to
eliminate the need to pay in any social security taxes. Likewise, for those folks lucky enough to be
receiving Social Security benefits, the use of corporations can maximize what
you receive and minimize how much tax you have to pay on them. Check with an aggressive client leaning tax
advisor for a specific game plan for your situation.
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I have been working with several people in recent
months in regard to having their homes owned by a corporation or LLC (limited
liability company) and treating it as rental property. Since rental property is entitled to many
more deductions than a personally owned home is, this seems, at first glance,
to be a winning move. Not always. As with everything in life, there are
trade-offs. While a rental property
allows very lucrative deductions, the trade-off comes when the home is
sold. The new tax rule for up to
$500,000 of tax free gain per couple is only available for sales by
individuals. A corporation or LLC would
have to do a 1031 tax deferred (a.k.a. Starker) exchange in order to avoid tax
on the gain. This is definitely a case
by case decision that should be evaluated with your tax advisor and your
crystal ball.
I have discussed a number of times how to play the conversion game, where people can move into a rental home and then sell it as a primary residence. This could then be done again, and again, to liquidate several rental homes tax free. The new law has a two year occupancy rule, so we assumed you would have to live there for two years before you could sell it. A recent IRS ruling interpreting the new tax law makes it easier to use this serial home selling with much less time than two years. The tax law allowed a pro-rated tax free exclusion for people who didn’t meet the full two years of minimum occupancy. Many people expected this proration to be of the amount of gain to be excluded. For example, if your gain was $150,000 and you only lived there for one year, you could only exclude half of the gain, $75,000 and would have to pay tax on the other $75,000.
In a rare (and possibly short-lived) ruling, IRS came out with a different interpretation. The amount of excludable gain is pro-rated based on occupancy time. In the above example, the excludable gain would be $125,000 for a single person or $250,000 for a married couple.
What this means is that you can compute what your profit is for each of your rental homes, and then figure how long you would have to live there to exclude its gain on sale. This is very good news for the simple reason that if you had to wait two full years per home, it would take a very long time to sell off all of your rentals. My problem with any tax saving strategy that runs over several years is trusting Congress to leave the rules as is. To expect them not to modify this in the next ten plus years is ridiculous. This is another reason why it is crucial to know the cost basis, including depreciation taken, for each one of your properties. If your tax person is not supplying you with copies of your detailed depreciation schedules, insist on getting copies of them.
In the haste to exploit the tax free sales opportunities, you should also be aware that only some states have conformed with the new generous federal rules. For example, California has conformed with the federal rule, but Arkansas hasn’t. Those that haven’t yet adopted these new rules do still have the old replacement and over-55 exclusions. This is definitely an issue that you should discuss with your tax advisor prior to the sale. For those of you determined not to pay state taxes, there are various steps that could help out. One might be to buy a replacement residence of equal or greater value in a state that has conformed to the new federal rules. Then, when the new home is sold, the former state is left out of the loop. This may sound overly sneaky to you, but I can assure you that people will be doing this.
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I find myself spending more and more time debunking misinformation being spread by the mass media and by individuals on the Internet. State tax withholding on income for nonresidents is fostering its share of bum info. A recent discussion thread in the NSA SpeakerNet newsletter on California’s withholding tax on payments to speakers has done more to confuse the issue than clarify it. That’s not exactly a positive thing for a group whose job is communication.
They give the impression that this is a new excise tax, on top of the ones we already pay. I have extensive experience with this very issue, so I am qualified to explain it. I have been presenting real estate continuing education classes around the country for the past 15 years. About 10 years ago, when California started withholding 3.33% of the gross sales price from some nonresident sellers of real estate, I can remember Realtors there freaking out that this was a new tax. Just as with the 7% entertainers tax withholding, this isn’t a new tax. It is merely a forced withholding of estimated income taxes. This is for the express purpose of motivating people to file California income tax returns. The withheld taxes are applied against whatever tax is calculated for that particular year, with either a payment due or a refund. Many people have claimed that this tax withholding is not refundable. That is not true.
Without this withholding, there is no reason for people earning income within the state to file a California income tax return. For those people who live in a taxable state, they will be able to claim a credit against their home state’s taxes for the tax they pay on California source income. This means that they only pay one state income tax on that income. Unfortunately, the way the state tax credits work, they end up paying tax at the highest rate between California’s and their home state’s. For those people who live in tax-free states (i.e. Nevada, Texas, Washington, Florida), this will end up being a new income tax. This state tax is deductible on federal income tax returns.
I am in no way supporting the concept of California taxing nonresidents. In fact, I have been doing more work in recent years helping people arrange their affairs so as to avoid as many state taxes as possible, especially California’s. There are aggressive ways to avoid having to pay any California taxes involving the use of corporations and invoicing from out of the state. The key is to source the income from outside the state and keep the California Franchise Tax Board out of the information loop.
It is a fact of life that most new taxing schemes begin in California and then spread like a virus around the country. Several other states also require withholding on income earned by nonresidents. This is just to force people to file income tax returns.
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What you’re about to read may sound like heresy
coming from a crass, mercenary, financial oriented person such as myself. I think I listen much more closely to the
things that are said around the country than do most folks. My pet peeve for this article is the growing
trend of putting price tags on things that shouldn’t be valued in dollar terms.
IRS Reform
For decades, I’ve been discussing the marriage
penalty that is inherent in the federal tax system, forcing many married
couples to pay thousands of dollars in extra taxes each year. The government’s own estimates of this additional
take are in the $80 billion range per year.
As with most government statistics, these are tainted by their
objective. The real numbers are
actually much worse. However, in spite
of this acknowledged mistreatment of married couples, it has never been
remedied for one reason. The government
needs that extra $80 billion more than the couples do. Any politician who refuses to fix this is
saying quite explicitly that it is okay to mistreat people for being married if
it yields more money for the all important big central government.
This very same argument has reared its ugly head
again, as Congress debates fixing the IRS in light of the abuses that were
aired during its publicized hearings.
They are estimating that fixing these IRS abuses will cost the
government around $18 billion over five years.
I realize this is a naïve viewpoint; but if a governmental agency is
caught terrorizing innocent people, causing deaths and other hardships, why is
price even a consideration? Wrong is
wrong and no price should be placed on human suffering. Actually, the way Congress is planing to pay
for the IRS reforms is to encourage more people to convert their normal IRA
accounts to the new Roth types and pay the additional taxes.
Value of
Human Life
In a similar vein, have you ever noticed how indignant
and disgusted newscasters become when reporting on a story where a person was
murdered for a small amount of money?
Almost weekly is a story where someone is killed and the newscaster
makes a big point of the fact that the killer only got some ridiculously low
amount of money, such as $25. The crime
is doubly repulsive because the amount of money is so low. What they are saying is that the murder
would have been understandable and even acceptable to society had the amount of
money been something larger. I have
written to news organizations asking them where the break point is between a
senseless murder and one that was reasonable.
Is it $10,000? $100,000? A million?
Does it matter how old the victim was?
My inquiries have been ignored, so I am still in the dark as to the
official value of a human life according to our moral leaders in the mass
media. Until I am convinced otherwise,
I will continue to believe that it is just as wrong to kill another person for
$50 million as it is for 25 cents.
However, I am open to new ideas if anyone wants to explain why it’s okay
to kill someone for large sums of money.
National
Security
Along those same lines, now that more people are
starting to discuss the Clinton sellout of American national security to the
Communist Chinese government by providing them with sophisticated nuclear
missile technology, the same kind of question is being raised. Why would Clinton sell out America for just
a few million dollars in campaign contributions? This same question comes up each time someone is arrested for
spying, as with Mr. Pollard, who is currently in the slammer for passing
military secrets to Israel. [A little
history lesson here: Israel is an ally of the United States. China has been an enemy of the U.S. since
the Communists took over in 1949. We
have fought against China in Korea and Vietnam and they currently have nuclear
missiles aimed at our country.] This
question has the exact same tone as the issue of how much money justifies a
murder. It implies that, while a few
million dollars is too low a price to sell out our country to the enemy, a
valid price does exist. How about a
billion dollars? Again, I may be old
fashioned, but I have always believed that if you care for your country, it is
just as wrong to sell it out for a billion dollars as it is for a million. Am I alone in thinking it immoral to even
consider setting a price on a nation’s security and sovereignty or a human
life?
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Since March, I have been using the infamous Windows
98 operating system that is so dangerous that the massive power of the federal
government has been harnessed to stop its spread. I wasn’t planning to set it up so soon, but when my system crashed,
I didn’t feel like reinstalling Windows 95; so I took the plunge.
My opinion is that it is a definite improvement over
Windows 95. It’s not as big a change as
Win95 was over 3.1; but it is much more stable than Win95. The BSOD (blue screen of death) still pops
up occasionally, but not nearly as often as it used to. With the built in diagnostics, along with
Norton Utilities, I have yet to have a fatal crash requiring a hard drive
reformat or reinstallation of Windows.
The big issue supposedly freaking the feds out is
the way Windows 98 is integrated with the Microsoft Internet Explorer web
browser. That is true and should be a concern for Netscape. Since installing Win98, I have been using
its Outlook Express for my e-mail instead of Eudora and MSIE instead of
Netscape. However, I have installed
Netscape with no problem and use Opera as my main browser, so it could have
been worse for Microsoft competitors.
Microsoft is maintaining a much lower profile with
this version of Windows than the super hype surrounding the launch of Windows
95 because of the problems with the Justice Department, which were caused by
Bill Gates’ refusal to give campaign contributions (a.k.a. bribes) to the
Clinton organized crime family.
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One of my favorite aphorisms that describes one of
my overall concepts of life is that it is better to teach a person how to fish
than to simply give him fish. The
reason is obvious. If you learn how to
fish you will be independent and self sufficient, living or dying based on your
own actions. If you want to sit on your
butt and not go fishing, you will suffer the consequences. One of the not so positive trends in our
society is the movement away from the self fishing to being dependent on
someone else to do all of the work for us.
I’m not just referring to the ever expanding socialism in our great
society, where Bill & Hillary and their big central government take care of
all of our problems. That is as obvious
a recipe for disaster as anything with more and more people dependent on and
beholden to the central government. I’m
more interested, for the sake of this discussion, on those tasks we have
delegated to private industry. One
extreme example is food production.
Most of us have become so removed from the actual source of food that
millions of kids have no idea that milk or hamburgers come from cows or eggs
from chickens. I’m not suggesting that
we all go back to having our own cows and chickens, but when the main food
supply is shut down, having a backup source will come in very handy.
More germane to my focus, and what I started out wanting to say, is the matter of who makes financial decisions. This is bound to rile up some of the financial advisors who read this. In the financial advising profession, there are a couple of main styles of relationship between the clients and their advisors, ranging the full spectrum from the clients doing everything on their own with no outside input, to relying on outside advisors for even the most minute decision. I have worked with all kinds of clients. Far be it for me to tell anyone how they should run their life. However, I do have some suggestions for what I believe to be a positive goal, independence and self sufficiency.
There are some financial advisors who relish the sense of power they have in hoarding as much of their clients’ information as possible. I have mentioned a number of times how many tax preparers don’t include detailed depreciation schedules and other supporting documentation with their tax returns. When a client wants to know the tax basis of an asset, s/he has to call the preparer to obtain that number. Some preparers do this intentionally in order to keep their clients dependent on them. Others do it because they are not farsighted enough to realize that providing this data empowers their clients to make better informed decisions. An advisor who has such low self esteem as to intentionally hoard clients’ information is a candidate for disappointment. There is also a potential problem with the unintentional hoarders. As much as we in the financial advising profession want to be available to help our clients for the rest of eternity, that just isn’t going to happen. Even the cleanest living of us (i.e. no smoking, drinking, etc) will eventually take that big trip. If the client doesn’t have a contingency plan or the information with which to work, s/he will be as much in the dark as when the financial spouse dies. To make sure you don’t put yourself and your family in this vulnerable a position, ask you financial advisors for copies of any relevant worksheets that would be useful. A good forward thinking advisor should have no problem in supplying you with all of this data. If s/he balks, it’s a good sign that s/he wants to keep you dependent on him/her.
I have been doing a lot of work with people setting up corporations in order to protect their wealth and save on taxes. What has been a bit frustrating for me is imparting the overall game plan so that the clients are able to make decisions somewhat independently rather than having to call me for every little thing. What will they do when I’m not around?
There is a commonly held belief around the country, and especially with current and former IRS employees, that everyone is a tax cheat looking for ways to screw the government out of its God-given right to everyone’s money. As with many of these commonly held beliefs, that’s a load of crap. I work with thousands of real life people of every imaginable type. My take on this is the opposite. Too many people are too honest. By that I mean I encounter all the time people who are perfectly entitled to claim a lot more tax breaks than they are because they don’t have perfect documentation or if it’s in the notorious gray area. I feel a little sense of failure in my mission to inform people of alternative methods of calculating deductions and giving them the confidence to claim those things. People who are not deducting the cost of their cats, dogs & horses, the costs for their kids’ schooling & medical & childcare costs, are too honest. This is costing them literally thousands of dollars in additional taxes every year. I guess the old saying is true. You can lead a horse to water, but you can’t make him claim all of the tax deductions to which he is entitled.
I am also finding it a bit frustrating to hear that many people who have tax advisors who favor the IRS’s side of everything are staying with those advisors. I’ve had people tell me of asking their advisors the questions I had in my article on IRS leaning preparers and whose advisors answered them all just as if they worked for the IRS. While I assumed that such an admission would cause the persons to seek tax advice from someone who works for the clients, it amazes me that they continue to use self-professed IRS leaning preparers and advisors. It boggles my mind to hear of people paying in tens of thousands of needless tax dollars every year just so that they don’t have to hurt their preparers’ feelings by switching to someone who believes in helping clients save on taxes.
I therefor reject the notion that everyone is a tax cheat. My mission in life is to move them from too much honesty (wimpiness) to being more reasonable, fair, and realistic.
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Rarely a week goes by
without the announcement of some humongous mega-merger in pretty much every
industry. While at first blush, such consolidation
appears to be all bad, it does have the potential for opportunity if the
government stays out of it and allows market forces to operate. I don’t deny that these mergers are causing
major inconveniences, especially for the employees who are displaced as
redundant. Quality of service suffers
as well, as it has with my bank in Harrison since it was merged with a bank
holding company from Alabama.
Banks
Having grown up in the
San Francisco Bay Area, I have long been among the many people who have tried
to stay out of Bank Of America’s evil clutches for years, only to have it
swallow up their bank. The recently
announced merger with NationsBank and the relocation of headquarters from San
Francisco to Charlotte, North Carolina, have spread the menace to the
South. Banks that have vowed never to
sell out are finding it impossible to resist the big bucks being dangled in
front of them. These mergers do
increase the amount of money controlled by a few big players. This will inevitably lead to the federal
government controlling more of the financial markets due to its “too big to
fail” policy. What this long standing
policy means is that large financial institutions, whose downfall would be too
disruptive to the economy, are guaranteed against failure by the feds without
the normal $100,000 FDIC limit. This
can’t lose policy allows the management of these institutions to take
outlandish risks knowing that such a safety net exists. The cost to the taxpayers to bail out these
institutions will be similar to the bail-outs of the savings & loans in the
1980s. Luckily for the fictitious
budget surplus, such bail out expenditures are off budget and won’t count
against it.
The opportunity here
is obvious. To the big behemoth
financial institutions that are controlled from out of town, most of their
customers are small potatoes and are being treated as such. A locally run bank that treats its customers
in a decent manner should have no problem attracting customers.
Software
Same issue. Companies, even those who swore to remain
independent, are being gobbled up on a daily basis. A few months ago, the president of Lacerte Software, the company
I have been using since 1985 for tax return preparation, sent out letters
denying merger rumors and swearing that his company would never sell out. In the May 19 Wall Street Journal was an
announcement that Lacerte is being sold to Intuit, the company that produces
Quicken.
While it looks like a
few companies control everything, there will always be a need for specialized
programs that do tasks that slip through the big guys’ cracks. With more and more software being
distributed over the internet, the cost of producing and distributing the
actual software has dropped to virtually zero, making it much easier for anyone
to set up shop.
Media
There is a
consolidation in just about every form of media; newspapers, magazines,
television, radio, and newsletters. I
enjoy being independent and able to say things in this publication that would
not be accepted anywhere else. In
theory, I feel confident that I can resist temptation, but everyone has a price
where resistance is impossible. I can’t
predict how I would react to an offer of a billion dollars.
CPA Firms
The Big Eight became
the Big Six and are headed for the Big Four.
While they seem to be swallowing up all of the world’s tax, auditing and
consulting work, big firms with thousands of partners just can’t provide the
level of personalized service that a small nimble firm can. I’m not scared.
Car Companies
Chrysler’s merger with
Daimler Benz and the BMW and Volkswagen fight over purchasing Rolls Royce are
precursors of a worldwide consolidation that seems to be setting the pattern
for the upcoming one world government.
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Have you noticed a decided increase in the number of opinion polls being reported nowadays in the mainstream media? I know I’m not the only one who doesn’t believe the statistics being reported, especially the ones claiming 60-70% of the people in this country think the Clintons are the greatest president ever.
First is the question of who is participating in these polls because nobody I have met knows anyone who has. Some TV shows, such as Inside Edition and local news stations, have call-in polls with a 900 number. These results are obviously tainted from the beginning because they include only morons who want to pay 50 cents to a dollar to vote in meaningless surveys. These are of course the same people who keep those wonderful psychic phone lines busy at $3.99 per minute.
The next question is why the media make such a big deal over opinion polls. The answer is a desire to force everyone to conform to their views. It is human nature to want to fit in and get along with others. If they tell us that everyone thinks the Clintons are God’s gift to the world, there must be something wrong with anyone who doesn’t think along the same lines. It’s peer pressure, plain and simple. They want anyone who holds contrary beliefs to their own to feel like a sicko. The surveys are not in fact a mirror on current public opinion, but a mold for how the media elite say we should think.
This “follow the group” mindset is also exploited by private industry. That is why book publishers manipulate the best sellers lists and movie companies manipulate the opening weekend ticket sales figures. They know that people like to join a crowd and associate a lot of sales with something good.
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I am often asked what other publications are useful
for keeping up on the ever-changing rules of the tax game. Such a question doesn’t offend me in the
least, because in spite of this publication’s wealth of unique insight, it does
have the limitation of being a quarterly.
There are some other more frequently issued publications out there. As a news junkie, I have subscribed to almost
all of them. Some I have renewed and
others I have felt to be rip-offs.
CKiplinger Tax Letter is issued every two weeks. It does a good job of summarizing , in its four pages per issue, most of the commonly felt changes in the tax code. However, its approach is pretty dry and generic, with no aggressive tax strategies offered; similar to the kind of information provided by the IRS. It costs $59 per year. Their phone number is 1-800-544-0155. Every so often, they send their subscribers an offer to send four sample issues to other people. If you would like me to sign you up for that sample offer, let me know.
DTax Wise Money is a monthly that is published by Agora, Inc. of Baltimore. It is promoted very heavily as being the ultimate guide to aggressive use of the tax code. However, for $69 per year, each issue contains several teasers for get rich quick and pyramid schemes, which are available for several hundred dollars extra, plus tips on hot stock investments. I am sure the newsletter publishers have a direct financial interest in promoting those stocks. Besides the sleazy nature of the offers they promote, they can’t seem to get their tax facts correct. In spite of having several CPAs on their advisory board, each issue is filled with outright errors that even the most bone-headed IRS agent would catch. For example, in the May 1998 issue, they claimed that the deduction for charitable use of your own vehicles was 32 cents per mile for 1997 tax returns. As I have discussed several times before, IRS long ago determined that vehicles use less fuel and incur no wear & tear when they are on a charitable mission, so the IRS only allows a deduction of 12 cents per charitable mile for 1997. If you want to learn about the latest get rich quick opportunities, you can subscribe to Tax Wise Money by calling 1-410-223-2678.
CWall Street Journal has a very handy Tax Report on page one of each Wednesday’s edition. It is similar in style and content to the Kiplinger Tax Letter in that it includes a lot of new tax law changes as well as some interesting statistics and tax court rulings. It also takes the generic approach to interpretation instead of the more aggressive angle that you find in the Kerstetter Letter. My only real complaint about the content of the WSJ Tax Report is its use of government supplied statistics as gospel, as described in my earlier discussion of the tax gap. The WSJ is $89 for 26 weeks or $175 for a full year. Their number to subscribe is 1-800-228-3880.
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I’ve discussed several aspects of how almost anyone can use a corporation to reduce or eliminate their income and payroll taxes. Another opportunity corporations allow is to become a little less visible to others. The reason I am mentioning this is that I have been noticing a lot of people naming their corporations after themselves, sometimes just putting Inc. after their own names. While at first blush this may seem to make everything cleaner by distinguishing exactly whose corporation it is, is that necessarily something you want to advertise?
It is almost impossible to keep all of your financial affairs private and is becoming even more so as Big Brother asserts himself in more aspects of our lives. When ambulance chasing attorneys are considering whether to sue someone, they sniff out all potential assets in your name. Having an easily identifiable corporate name is like an advertisement to money-sniffing leeches. I like to see generic type names that don’t advertise the ownership. Of course, someone who is interested in learning the ownership can dig into the Secretary of State’s records, but just as locks on doors keep out the casual thief, a determined one will always find a way in. Using multiple layers of corporations, trusts and partnerships erects more and more privacy.
Even though you have a generic bland corporate name, you can still operate as something else, a DBA (doing business as), as long as you aren’t going to be confused with someone else in the area using a similar name.
There is no such thing as a one size fits all when it comes to business. I just think more people should consider the privacy opportunities of naming their corporations something that allows them a thicker shield of anonymity.
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SHORT TERM
THINKING
I have harped for years on the poor memory this country has for the past. Anything more than a few weeks ago is ancient history, not worth remembering. It seems this trend is just getting worse with daily polls of current opinion dictating policy decisions. A reminder of some ancient history, the 1992 Ross Perot candidacy for president. He suggested setting public policy by having electronic townhalls, with the American population voting on what they want done. This is coming true, with daily opinion polls used to establish official government policy. This obviously thrills those who think it makes possible pure democracy. Besides the fact that the United States was not set up to be a democracy (it is a republic), this reliance on current popular opinion scares the heck out of me, for several reasons. First is obviously the fact that the public is so fickle that public opinion changes course as often as the tides. It is also not news that the public’s overall intelligence and level of knowledge are dropping like a rock (dumbing down). Public opinion is so easily manipulated that it can be used for nefarious goals. How else do you explain so many people believing that the Clintons care about their problems, when the Clintons care about nobody but themselves? More then 50 years after the fall of Nazi Germany, people all over the world still ask how so many decent people could be worked up into such a frenzy to commit such atrocities against other human beings. I have long believed that the Clinton regime has been following the same game plan as used so effectively by Adolph Hitler. Hitler fomented hatred against certain groups that he accused of causing all of society’s ills; Jews, gypsies and homosexuals. How is that different from the Clinton gang’s demonization of rich people, smokers, SUV drivers and gun owners? It’s classic divide and conquer.
We have lost touch with our fundamental anchors for deciding what is right and wrong, the Bible and the Constitution. These documents were established to be eternal references for answering the questions that are to come up for the subsequent centuries and millennia. The authors knew that to trust the popular public opinion for such decisions was a recipe for disaster. While religion is beyond the scope of this newsletter, it is a well known fact that current reference to the teachings of the Bible has been watered down so that we now have the Ten Suggestions instead of Commandments. I do know politics and the Constitution and it is no stretch to say that it has been shredded beyond recognition and recycled into toilet paper at the White House.
So as always, my goal is not to just point out problems, but to offer suggestions for dealing with them. You have the option to join in with the lynch mob mentality and attack those evil people chosen as targets by our moral superiors in Washington and in the media. Of course this approach has an inevitable conclusion, when you eventually are chosen as a member of one of the hated groups and everybody attacks you. Unless you are willing to refrain from joining in the attacks on the hated classes, and allow them their freedoms of choice, you have no right to expect any freedom for the things you like to do. Once it is accepted practice to demonize one group of people for their personal choices of smoking, it’s a natural progression to other “bad things,” such as alcohol and fatty foods, movements which have already begun. This doesn’t mean you have to join in street rallies to protest for the right to smoke or to own an SUV. You should however vote for leaders who respect freedom of individual liberty and let the media folks who join in these anti freedom campaigns know that you do not approve and will stop patronizing them and their sponsors. I have written a whole piece on the hypocrisy of the media who defend freedom of the press, while supporting the removal of any other freedom deemed to be not currently politically correct. Since public opinion polls are so important in determining public policy, it would also be helpful if you would speak up in support of freedom; that is if a pollster does actually talk to real people and not just the same circle of incestuous members of the media and residents inside the Washington beltway.
Besides not considering the past, fewer people think about the future. More and more young people don’t believe they’ll live to see old age, so what the Hell. This is downright scary. They also fail to see through from their actions to the long term consequences. Parenthood is a perfect example. People of my generation were pumping out babies because that was the thing you were supposed to do, giving no thought to the commitment and sacrifices that would require for the next 50+ years. To follow in Dan Quayle’s footsteps of using the Murphy Brown TV show as a metaphor for society, what happened to Murphy Brown’s famous out of wedlock baby (what used to be called a bastard)? It was a plot device for a few seasons and then dropped. Too many parents have done the same thing with their kids and society is suffering as a result.
I’m sure I’m an extreme example of thinking everything through for as long as possible. Anything I do I evaluate based on its consequences for the rest of my life and beyond. That is why I chose not to have any children. I have always believed that having a child is so important that unless one is willing to sacrifice everything to do it properly, it’s better not to do it at all. While there may be some things in life where half-assed is fine, raising children isn’t one of them. It’s either all the way or no way.
Here’s another analogy of thinking through all of the consequences. Shooting a gun or rifle. Many hunters or people just shooting up in the air don’t consider where the bullet will end up. If the deer is missed, the bullet could and often does whiz into someone’s home. One of the leading causes of death on New Year’s Eve in big cities is from morons shooting into the air. Those idiots are too stupid to realize that the bullets don’t go up into outer space, but fall back down to earth, often killing innocent people. Everything you do and say should be considered a bullet.
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