Bogus Tax Gap

I have often explained how the stories of a Tax Gap in this country are nothing more than propaganda intended to bolster calls for more enforcement power for IRS. My own investigations into how the supposed undercollected tax amounts are calculated had the IRS admitting that the numbers are pure guestimates.

The National Taxpayer Union has an interesting debunking of a recent book on this topic, which you can find here.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2001 05:47:00 PM Send this post:

 
Cradle To Grave

I've frequently commented on the growth of hidden taxes, where the government snatches money from everyone in a less conspicuous manner than via the dreaded 1040. Deroy Murdock wrote this amusing illustration of how impossible it is to avoid those hidden taxes.

Unfortunately, the trend is that we will be seeing many more of these hidden taxes in the years to come. In fact, even if Bush is successful in reducing the income tax rates, most people will still end up paying more money to Big Brother through the increased hidden taxes.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2001 12:22:00 PM Send this post:

 
Residence Sales

Almost every single day, I encounter someone asking about the tax ramifications of selling their home. They are almost always under the impression that either they have to reinvest into a more expensive home or wait until after they are 55 in order to receive a tax free exclusion of profit.

The current rules for residence sales, which allow up to $250,000 or profit per person tax free, are summarized here.

This is such a perfect illustration of the problem with our tax system. It's ever-changing and so few people understand it.

What is so amazing to me is that this isn't a recent change. It happened almost four years ago, in May 1997. It is taking an awfully long time to filter out around the country. What is even scarier is that there are still many tax & real estate professionals who are completely unaware of these changes. There is even one alleged Tax Expert on AskMe.com who is totally oblivious to this tax law change, as well as most other aspects of tax law.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/23/2001 09:02:00 AM Send this post:

 
Special 1040 Form

Courtesy of BoingBoing, here is a specially modifed 1040 form for laid off web workers.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2001 07:42:00 PM Send this post:

 
Tax Day Is Up To You

Too many people in this country buy into the perception that all tax returns have to be submitted to Big Brother IRS by April 15 (actually April 16 this year due to April 15 falling on a Sunday) or they will be hauled off to prison. As is so much conventional wisdom nowadays, this is complete hogwash. As described here, there are some very good reasons to file an extension and submit your tax return by August 15 or October 15, such as reducing your chances of audit and increasing the tax return's accuracy.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2001 04:15:00 PM Send this post:

 
Get Your Checks Back

Many banks are allegedly making things more convenient for their customers by no longer returning their cancelled checks to them, and instead providing a photo-copy of the fronts of the checks. This is really just a cost saving scheme for the banks and will cost their customers huge sums of money in the end because the front isn't the only side of a check that is important.

I can assure everyone that this concern isn't due to any fear of change or an indicator of my anal-retentive personality. There are very valid reasons why this is a dangerous idea.

Unless the bank's printed copies show both sides of the checks, this will do a great disservice to their customers. As a CPA who has to frequently work with checks, I often find it essential to refer to information on the backs of cancelled checks. With payments to IRS, this is absolutely crucial for tracking down where payments have been applied. IRS prints tiny code numbers on the backs of checks identifying the account number and tax period to which payments have been applied in their system. Almost every week, I have to send IRS a copy of the back of a client's cancelled check in order to locate a payment, normally of several thousand dollars. If banks no longer provide copies of the backs of checks, it will be impossible for us to locate these payments. With IRS matters, the burden of proof is on the taxpayer; so if we can't prove a payment, IRS won't locate it for us.

I have also handled several fraud investigations over the past years where the endorsement signatures and other information on the backs of checks were critical for determining the perpetrators. Not having the backs of checks returned for examination will make this kind of detection impossible to do and could encourage embezzlers to steal more. I'm positive other CPAs will agree with this concern. It will also make normal audit verifications impossible.

If your bank tries to institute this kind of policy, you need to let them know that it is not acceptable. If they refuse to budge, change banks. In fact, I hope banks that will return actual checks will publicize that fact so that potential customers can take notice.

When our main bank, Regions, tried this scheme on our accounts over a year ago, I insisted on receiving the actual checks back, which they do send. We just received a notice from Sherry's bank, First Federal, that they will no longer be returning actual checks. Their notice, which they titled "The Better Checking System," doesn't give any option to continue to receive checks. I wrote to the bank explaining what I have discussed here, with the hope that they modify this new policy. We'll see if it has any effect. Otherwise, we will be changing banks.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/20/2001 10:07:00 PM Send this post:

 
Tax Reform Promises Are Like Apple Pies

This isn't for the squeamish.

Several years ago, I came up with the analogy of how the process of tax reform laws being developed by Congress is exactly like the process the human body does to an apple pie. While the initial proposal (pie) is very appetizing, the end result looks & smells very different.

With that exact same process currently underway in Congress on the Bush tax cut proposal, I thought another look at this is in order. I have posted on my website a more detailed description plus a copy of my infamous poster illustrating this process.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2001 10:04:00 AM Send this post:

 
Tax The Sick

As I explained earlier, the Governor of Arkansas, Mike Huckabee, signed the bed tax into law. Besides the unconstitutional censorship aspect of that bill, I am increasingly upset by the sheer gall of exploiting sick people in this way. While $5.25 per day may not sound like much, that works out to an extra $1,916.25 per year. The fact that most people in nursing homes are not very well off financially makes it all the more disgusting that they are being forced to pay almost $2,000 more per year. I guess since we have a "death tax," it's only expected that we should also have a "sick tax."

In a bit of additional irony, in the same issue of the Arkansas Democrat that reports the signing of the bed tax law, Huckabee himself has an article where he criticizes the Cato Institute for giving him a poor grade in respect to taxation. I'm trying my best to be diplomatic with the Gov. I have never met him, and have heard that he is a nice guy. However, this hypocrisy and exploitation of sick elderly people is pathetic. With the national media promoting the Democrats' stereotype of Republicans as being mean to old people, I can't see that Huckabee is doing anything to dispel that image.

KMK


- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2001 12:59:00 PM Send this post:

 
Hiding Taxes

I have written several times about all of the hidden taxes we pay. While all of the current discussion is on reducing income tax rates, there are more and more taxes and fees assessed on just about everything we spend money on. We all pay huge amounts of taxes with each tank of gas and each month's phone bills.

It is a very real game for our rulers as to how they can siphon off more money from the people without being held accountable. Because our rulers are afraid of the negative conotations inherent in the word "tax," they often use euphemisms to disguise the true nature of the charges froim the most gullible of our society.

What triggered this rant is a current bill (HB1274) about to be signed by the Arkansas Governor to raise money for nursing home regulation. It assesses a fee on nursing homes of $5.25 per day per resident. Because the Gov is allegedly an anti-tax Republican, this charge isn't called a tax in the bill. It is called a "Quality Assurance Fee," which makes it acceptable for the Gov.

Believe it or not, that isn't what has me mad and disgusted. Here's the topper. In the bill, nursing facilities are specifically not allowed to list this new fee on the bills they give to their patients. This is a direct violation of a little something called the First Amendment, which is supposed to guarantee all Americans (including businesses) the freedom of speech. Of course, this is considered irrelevant in the pursuit of money for our rulers.

This trick of forbidding businesses from informing their customers about taxes isn't a trick exclusive to Arkansas. A few years ago, our rulers in Washington (Congress & the FCC) tried to prohibit telephone companies from describing the taxes as that on the bills they send customers. After the public, and talk radio, got wind of this infringement on the First Amendment (aka Censorship), the FCC backed down from this rule. They didn't reduce the tax, but allowed the phone companies to label it as a tax on bills.

It's too late to remove this censorship provision in the current Arkansas bill. However, I hope that nursing home operators refuse to comply with it and show the new tax on the bills they give their residents. It is a dirty trick by our rulers to hide from personal responsibility for the taxes they hit us with. In fact, whan I prepare a tax return, I often point out how much of the taxes were due to certain things, such as the Clinton-Gore tax hike of 1993, which raised taxes tremendously on Senior Citizens. If nursing homes would label this as the "Huckabee Bed Tax," which is what people are currently calling it, I wonder how long it would last.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2001 10:08:00 PM Send this post:

 
Selecting A Tax Preparer

Since this is Tax Season, it's time for another look at things to consider when selecting a professional to help you. Even though I wrote this guide a few years ago, it is just as relevant today. In fact, we "lose" several potential new clients every week because we can't fill their need to sit down & visit with them due to the way in which we conduct our business. That doesn't hurt our feelings because everyone places different amounts of importance on different things. It's their right to place more emphasis on being able to physically meet with their tax person than on paying the least tax.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/06/2001 08:55:00 PM Send this post:

 
Look Before You Leap

I guess I really shoudn't be surprised at the number of stupid people in this country. However, it never ceases to amaze me how often people will set their businesses up as an LLC or an S corporation without the foggiest idea of what the heck they are doing. Practically every single day on the tax question boards on such sites as AskMe.com, someone is bragging that s/he has an LLC or an S corp and wants to know how the taxes are handled. They are shocked to learn for the first time about some of the pitfalls inherent in the format they selected. I can't resist saying something as direct as "this should have been reviewed before you chose that format. It's a bit late to think about the tax consequences now."

For those of you who have the good sense to research the tax aspects of different business formats before starting out, check out this comparison. There is no such thing as a one size fits all; but I've lost track of the number of occasions I have heard of where a business owner cut his/her own throat by using an LLC or S-corp instead of a C corp.

This is another reason why I distrust the IRS & media claims of the "tax gap" in this country. Rather than underpaying taxes, most people are overpaying because of idiotic moves like this.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/06/2001 08:32:00 PM Send this post:

 
It Was Priced Too Low

For several months, we had been offering our unique 285 acre ranch for a price of $399,950. It would easily be worth well over a few million dollars back in our old stomping grounds of the S. F. Bay Area; but this is just Arkansas, so we adjusted accordingly.

A few months ago, some property close by sold for a per acre price that made our price seem ridiculously low. The final straw in our debate regarding the proper price came earlier this week from an IRS auditor, who was here working on a case. She also owns some farm property in Arkansas and has reviewed other local properties and informed Sherry that we were asking far too little.

So, we have bumped up the price to $449,995, which is still much lower than similar properties are selling for. Perhaps, if we don't sell at this price, we'll raise it again in a few months, and again later, until we hit that magic number. There are obviously some potential buyers who suspect that there must be something seriously wrong with a property this large if we are only asking this much.

Interestingly, the same auditor also told Sherry that some CPAs & tax attorneys in Fayetteville, with much less expereince than I have, are charging $500 per hour. While my current rate of $195 per hour is much lower than what I used to charge back in California, I was under the impression that it was very high for Arkansas. We'll have to check this out after Tax Season.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/02/2001 02:37:00 PM Send this post:

 
Beware of Tax Protestor Schemes

If it sounds too good to be true, it probably is.�

IRS has finally started doing what I have been advocating for decades; speaking out against the various tax protestor scams that have been sucking in gullible people.� This is a welcome change from the Service's former approach, ignoring the promoters of the schemes and saying nothing.� This silence was used by the promoters to signify that IRS had no problems with their ideas.

I don't want to repeat information that is easily accessible elsewhere, so here's a good place to start if you are curious about a tax protestor program.�It's the IRS Criminal Investigation Tax Fraud Alerts.

Another good resource is this page with IRS Small Business News Alerts.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/01/2001 02:32:00 PM Send this post: