Ask Uncle Bill

No Post Tomorrow

Have to pass on tomorrow's post.  My son called and there seems to be a lack of golfers in the United States Air Force so I've been drafted to show up and try not to make too big a fool of myself.  Revielle is 5:30am  and then a four hour drive so no time to post in the morning.  Chance to see Buck the Dog who is in a bit of hot water as he chewed up one of Tye's favorite plants and then chewed the wood off the barbecue grill.  A dog has to do what a dog...

Should be interesting though as I have never played an Air Force course (your tax dollars at work) and air bases by definition are pretty flat so I'm not  expecting Pebble Beach.

Got to go to the range and see if I can still hit it.

Have a profitable weekend.  I won't with gas prices and this trip but it will be worth it.  See you on Monday.

 

The Oil Bidness

I hate this subject.  The politics are so lame and the oil companies don't help themselves by reporting record earnings.  And everything is done too late.  Politicians scream about windfall profit taxes.  Like they would give the oil companies windfall loss breaks when the price goes down and the companies report lower earnings.  Or maybe one politician could explain to us how a tax would reduce the price of gasoline as the capitalist thing to do when taxes go up is to raise your price to recapture the earnings lost to the tax. 

And when a Republican is the one to figure out how some of this stuff started, I am amazed.  Where are the Democrats on this?  Arlen Specter pointed out that mergers done in the 90's and some in this decade have concentrated the industry.  Way to go, Specter.  But you can't undo mergers.  Oh, you can but not overnight--look at AT&T. 

But I have a rule that I don't rant against things I can't change so we'll leave it alone.  But what I can do is comment on things and one thing I remember is an oil company executive being brutally honest...and right.

In a congressional hearing some senator thought he had one exec on the run.  To paraphrase "Did you raise prices after Hurricane Katrina?"  The exec, "Yes."  A gasp from the audience.  "Did you raise the prices a lot?"  "Yes."  Another gasp.  "Substantially above your cost?"  "Yes."  Yet another gasp...you get the picture.

What was this guy doing?  This guy was going to get killed.  But he didn't because his rationale for 'price gouging' was to reduce DEMAND so as to not run out of SUPPLY.  With Katrina knocking out 50 year old refineries and demand from China exploding and Nigerian rebels taking over oil rigs and Chavez going schizo down in Caracas this guy didn't know what was going to happen.  But he did know he had a supply problem so he had to fix it and he did by raising prices.  And it worked.  We have high gas prices but we don't have a gas shortage. 

Raising prices makes people think about driving and if they cut back, then supply goes further.  Simple.  If the price stays low, people think everything is ok and go driving around wasting gas and if things are not ok, then supply dries up and you have shortages.

This happened in the, well, a long time ago when the Arabs cut us off, we got PRICE CONTROLS and suddenly we had gas lines and people ran out gas in those lines which made things worse and then people filled up whenever they got a chance which reduced supply even more because everybody had a full tank of gas in their car.  Then people cut back on driving and the shortage disappeared.

"So what?" you say.  "I can't cut back on my driving, I have to drive to work or to grandma's or the store."  Yes, you do and you will and you will cut back on driving, somewhere, because you already have, haven't you?  Yes, you have.  And the price and the supply will come back in line unless somebody in Washington does something stupid.   

Major Malpractice

I was on the practice range on the golf course and ran into an old neighbor, Bob.  Bob and Cathy had two young kids just like us and we met as they built their house and we built our house.  Their son was a year older than our son and their daughter was the same age as our daughter so we knew each other ok.  Neighbors and friendly but not great friends if you know what I mean.   

Both Bob and Cathy are doctors and Cathy specialized in emergency room work which is stressful and results in odd hours.  And Bob was never going to be in the running for Father of the Year.  Fathers are supposed to help sons build things and be encouraging and all that.  I was lucky in that my son was better at building things then I was but not Bob.  Bob kind of did it himself and yelled at his son when the son screwed things up. 

And Bob and Cathy weren't getting along and one day they split up and Cathy and the kids went back to Kansas.  We found out later that Bob was playing doctor down at the hospital with some of the nurses and Cathy found out and that was the end of that.  Bob stayed here and married one of those nurses.  Sue ran into them once downtown and was amazed as the new wife looked almost exactly like Cathy.  I have noticed that divorced men tend to marry women who look like the first one so maybe trying to give it another chance.

Anyway, Bob and I will run into each other once in a while and we did on the range on Saturday.  I was going to play nine holes and, being the friendly sort, asked Bob to join me.  He agreed and off we went.

Most people who don't play golf have the impression that all kinds of business deals are done on the course and everybody spends most of the time yakking away.  Can't be further from the truth.  In 25 years of corporate life I never saw a deal, even the mention of a deal, done on a golf course.  Just conversation is difficult as the average golfer sprays golf balls all over the place.

And Bob is the silent type.  Unless around nurses, I guess.  But I was determined to talk to him because I had just had my physical the day before and I was pretty proud of myself because I got a 40% discount.  40%, Bobbie, whata think of that?  As some of you know, I have a large deductible health plan and so when I go to the doctor I bargain.  And I got a 40% discount.

Bob hit his tee shot on number 3 and said "You paid too much."  Huh?

Bob explained.  First, he said the health system is a mess.  No argument from me.  And the health insurance companies pay only about 30% to 50% of what a doctor charges which leads to doctors charging a lot so they will get more when they only get 30% to 50% of what they charge.  And the specialist gets the lower percentage which means a general practioner gets the 50% and the heart surgeon gets 30%.  Makes no sense.  Bob was right, what a mess.

And I don't know what to do about it but if you go to the doctor, pay cash and offer the doc 50%.  They'll take it.

SaraJane And The Match

Took a look last week at SaraJane who wondered whether to go to a "professional" for advice on a 401(k) rollover.  My advice, worth what it cost her, was to go to Fidelity or Vanguard and have them do the paperwork.  And then found this out in a follow-up email from SaraJane.

" love this kind of personal attention! Thanks for the advise!

I know that I want to get my money out of my old employer's stock (company match portion was in their stock and I left fully vested - I get extra points for that right?), so I guess that is really my basis for needing to do something.

Time to be more of a grown up and start doing my research."

SaraJane, I think the word is 'advice' but close enough.  But the conundrum is the company stock being the match.  I do not know why companies do this.  I assume it has something to do with accounting or it doesn't count against earnings or it's just easy for the company.

I don't know.  The companies I worked for said "Here's the money, here's the available fund choices.  Go for it but don't ask us for advice."  (Companies don't give advice because they are afraid of getting sued if, and when, the funds go down.  Good companies are starting to give advice because they figure they get sued all the time anyway and it makes sense to have knowledgable employees.)  But we didn't get the match in company stock.

But a lot of people do and a lot of financial advisors, writers and know it alls,  advise against it.  Because of Enron.  Two things happen when you get company stock.  First, if the stock is going up and going up by a lot, people assume it will continue to go up.  Like a rocket.  But rockets come down as well as go up.  But most people don't notice when the rocket starts to level off.  Oh, they notice but they don't do anything because the rocket might just be taking a breather and, more importantly, people are lazy.  Which is the second point.

Don't get me wrong.  I've made a lot of money by being lazy.  If the market is going up, I sit there and do nothing because it might go up more.  Or it goes down and I figure it is too late to do anything so I sit and it goes back up again.

The difference is that I'm looking at the market and if you have your match in company stock you are looking at one stock.  Whole markets rarely, if ever, go to zero.  But individual stocks can, and do.  Like Enron.  Or dot.com sock puppet stocks. 

My brother-in-law has the match problem.  He works for a very successful oil company with a CEO that figured out about ten years ago that the last refinery had been built in the US sometime in the Nixon administration.  Plus they were unloved because of environmental issues and it's just a messy business in general.  Unloved, no supply of new units and this guy saw it when nobody else did.  Stock went, and is, going up and going up a lot and my brother-in-law gets his match in the stock.  Great.  And I told him to get out or cut back or something.  Because the oil business is the poster child for boom and bust.  And my brother-in-law was way overweighted to the stock.

Has he?  I don't know but we did determine that he could switch.  In fact, the minute the stock match hits his account he can swith into something else.  This is great because he has choice.  I don't think the suckers at Enron did. 

But this is where you cannot be lazy.  IF you get your match in company stock, call up or email HR and find out your options.   If you cannot switch I would question the long term outlook for the company and just accept the fact that your nest egg can go to zero or start looking around for a new job.

If you can switch (and here again things get difficult because you have to do something), figure out your company stock as a percentage of your net worth.  If it is too high, switch some of the stock to other alternatives in the plan.  If you are good, here you yell GOTCHA because I tried to slide one by you.  I didn't define 'too high' and I won't.  You figure it out. 

So first find out if you can switch and then figure out what you are comfortable with and make the reallocation.  Or do nothing.  But be aware of the consequences because the people at Enron sure are.

And SaraJane, not really about "Time to be more of a grown up and start doing my research."  Just call Fidelity or Vanguard and dump it into an index fund.

Be Careful What You Pray For

It seems only yesterday that I was lecturing to you (acutally it was two days ago) about how to start small to get things done and make a difference.  Here is how I put it--

Overnight success usually takes a long time.  And the job is so daunting.  So break it down into a "series of small things."  You can find a million reasons not to do something.  Find a reason to do something.  And, as Vince says, start small.

I should have been a preacher, or a consultant.  Because doing and telling are two different things and telling is a lot easier than doing.  But my mother's voice from history came floating through my psyche and it boiled down to basically her sanitized version of "Put up or shut up."

Because I read my book contract.  I've read enough contracts to know a couple of things.  One party always has the upper hand.  As one company lawyer told me about one deal, "If there is anything in there in our favor, their lawyer screwed up."  And that is usually the way it is.

Two, that most writing in contracts is unnecessary and boiler plate and the real facts are scattered throughout the document.  And I went looking for the facts.  First, I found the sliding scale of royalties to me.  10% of the price goes to me for the first 7,500 books, then 12.5% for the next 7,500 sales and 15% on anything over that.  Good or bad?  I don't know.  And I don't care because I don't have another publisher waiting in the wings to drive up the commission.  So ignore that.

Then length.  We had had some discussion on this and I threw out 250 pages.  They asked for a word count so I went to three books on the libary shelve.  Counted the words on five pages, totalled them, divided by five to get a page average.  Did this for the three books and got an average of about 400 words per page.  400 words per page times 250 pages equals 100,000 words.  This was in the contract.  OK.

Finally the deadline.  And my blood ran cold.  Yours would too because any deadline will do that.  People hate deadlines.  But this one really got my attention.  We had briefly discussed the subject and I threw out 90 days.  Had to have something.  They agreed.  So I figured the contract would say something like 'manuscript due 90 days from the date of signing of contract.'  That was what I would do and most contracts I have read do this kind of thing.

Not these folks.  Right there--due July 3, 2006.  My execution date.  So did some quick figuring.  April 20th to July 3rd is 74 days, I think.  Leave a month for editing.  So 44 days.  I already have written about 20,000 words in the sample chapters so 80,000 remaining and round 44 days down to 40 and 80,000 divided by 40 is 2,000 words per day.

Piece of cake.  But wait a minute, that's 2,000 words a day, seven days a week.  No rest for the weary.

Went to my wife for advice.  But she is in the middle of a big fundraiser and I am on the sidelines.  She is always in the middle of something.  If we ever got divorced and the timing coincided with a big event the dialogue would go something like this.  Me first then her.

I don't know how to tell you this but J Lo called and can't live without me.

OK.

I've decided that to save her career I must go to her.

OK.

So I am leaving tomorrow after 30 years of marriage to you.

OK.

This breaks my heart but I have to follow my heart.

OK.

You get the picture.  Her advice on the book was basically, Quit Whining.

So I did.  And yesterday I wrote 2,000 words.  This is going to be rough.  Maybe I'll go back to telling people what to do.

SaraJane

I love questions from readers especially when they start out with openings like "Love your site..."  I tend to ignore and delete the ones that start out "You stupid...".  Anyway, a question from SaraJane in response to 'Charles Schwab Doesn't Want You.'

Dear Uncle Bill,

Love your site... I was just worried about this exact topic. I have a
little nest egg in my 401(k) that I need to roll over from my previous
employer. A friend suggested taking it to someone else to manage a little better
rather than just putting it into my company program.

Any thoughts on this?

SaraJane

My response:

SaraJane (love that name, by the way)

Please read my disclaimer as this advice is worth what it cost you BUT I don't think you have to move the 401k from your previous employer.  If you want to fine and I do hear about some reasons for moving (usually on one of those Saturday afternoon talk shows by financial planners) but can't really say why you should move it.  From personal experience I know you do not have to.  I kept my 401k at a previous employer for 10 years.  The administrator was a good friend and I liked the management of the fund and I was basically lazy.  Check it out with your previous employer, or your new employer, but again from personal experience, I have first hand knowledge that moving is not a given.

Sounds like you may not be crazy about the choices of your new employer or may not want to concentrate too much in one place.  I have found that is not such a good idea as you end up with a lot of money in small amounts in a lot of places.  I'm a believer in JP Morgan who said "Put all your eggs in one basket and watch that basket."

Not sure of your age or amounts but if you do want to move the money suggest you talk to Vanguard or Fidelity.  Moving money can be tricky, especially pre tax money, so I would go with them as they are very good and if they screw up, you can sue them.  Kidding but they know that and they do it every day.  And they love retirement accounts as noted in yesterday's post. 

Check out the category on investments on the right hand side of each post for more background..

I hate to say it but I don't like the guys at places like Schwab or Merrill Lynch as a lot of ex-shoe salesmen gravitate to this business.  Also, a lot of churning to generate fees and fees will kill you over time. 

So suggest you stick with your old employer, or new employer or Vanguard or Fidelity.  Not very sexy but then finance isn't.

Thanks for reading.  Please let me know how things turn out.  And feel free to suggest any topics for future columns.

Bill 

Pretty run of the mill but I should have added something because SaraJane is really smart.  Go back to her note and the most revealing statement is "I have a little nest egg in my 401(k) that I need to roll over from my previous employer." 

The revealing and smart part is "I need to roll over" because most people don't.  Most people do the worst possible thing--they take the money and they spend it.  But they only take half because they have to pay immediate taxes, Social Security, Medicare and a 10% penalty. 

But they justify it by saying it's not much or as SaraJane puts it "a little nest egg."  Get a check from the company and run down somewhere and blow it.  Because then they are violating the most basic of financial principals and one that has been discussed here and will be discussed here ad nauseum which is Do Not Confuse The Financing Decision With The Investment Decision. 

This is simple and basic.  If you cash in your tiny 401(k), which is now even tinier because of taxes and penalties, you will immediately develop a need for a plasma TV.  Or something else.  And you will buy it and forget about the 401(k) which could have been sitting at your old company or new company or Vanguard or Fidelity or some other place...and growing.  But it won't be growing if you buy the plasma TV because it will wear out. 

I'm not knocking plasma TV's.  If you want one, save up and buy one.  But don't use your pre-tax savings money to buy it.  In other words, Do Not Confuse The Financing Decision With The Investment Decision. 

So go do something with that money, SaraJane.  Call your employer, or old employer, or Vanguard, or Fidelity.  Just don't call Best Buy. 

I'm not really worried about SaraJane.  She's going to be a rich lady someday.  Probably sooner rather than later.  It's the rest of you people out there that worry me.  So be like SaraJane.

Advice From A One-Earred Man

Great things are not done by impulse but by a series of small things brought together.” – Vincent Van Gogh

I don't usually put a lot of credence in advice given by a guy who cuts off his ear and then kills himself but this quote by Vince caught my attention.  And boy, was he right.

Big news.  My book contract came in the mail yesterday.  I haven't read it yet.  I did open it to make sure the cover letter didn't say April Fool.  It didn't.  And if I never write the book (which I will) or if they decide not to publish it or they do publish it and nobody reads it or buys it, I don't care.  Because my "series of small things brought together" has paid off.  At least to me, anyway.  I have been rewarded because somebody read my proposal and my three chapters and said "Hey, this may be interesting" and they wrote me an email and then wasted a stamp and an envelope and I'll write the book and they'll send it to a publisher where guys with ink on their fingers will actually make a book and put it in boxes and send it to bookstores and high school clerks will open the boxes and put it on the shelves and people might buy it and I'll go on the Today Show with Katie Couric (no, I won't do that), Ok, NPR, Fresh Air with Terry Gross.  Ok, I'll do that and then I'll get a call from a big Hollywood producer and ...

All right, maybe not.  But somebody did say "Hey, this may be interesting" and they wrote an email and wasted a stamp.  So it is worth it to me. 

But if you want to feel stupid sometime, sit down and try to write a book.  Or a song.  Or a poem.  And there are so many other things to do like your job, your family, American Idol on tonight at eight. 

But most people want to be different.  They want to be CEO or Bono or the guy that wrote the DaVinci Code (who lives in the same town as a friend of mine.  My friend says the guy has a knock out wife--well, the rich get richer) or the next Apprentice.  But most people are not different and they get mad or frustrated because they are caught in dead end jobs or dead end relationships or dead end day to day living. 

But how do we get to be different?  And here I mean good different, not weird different.  But how do we get there?  What do we have to do?  And we're so busy with other stuff that we don't have time.  But most of us have time for American Idol.  It also explains the popularity of 'reality' shows.  We get to live the process and we know we could do better if only...

What, knew the producer?  Or the editor?  Or looked like Jessica Simpson?  In looks, there is not much we can do but in other things there is.  And sorry to sound like your Mom, or Vince, but you have to string together a "series of small things" to get a big thing.

Overnight success usually takes a long time.  And the job is so daunting.  So break it down into a "series of small things."  You can find a million reasons not to do something.  Find a reason to do something.  And, as Vince says, start small.

So here a  few small things to get you started.

If you want to make a million dollars, put a dollar in a drawer.  And tomorrow put in another and so on.  And read a book on asset allocation.

If you want a promotion, talk to somebody at work that just got promoted. 

If you want to write a screenplay, go to Screenplays For You and read one, or two, or three.

If you want to fix up your house, go to Home Depot.

And get an idea and then take another step.  And don't think about how stupid you feel doing it.  And don't listen to people that say you can't do it.  Because they will, believe me.  And if you fail, so what? 

If you try something and succeed, you will feel great.  If you try something and you fail, you will remember it and learn from it.  If you watch American Idol tonight, you will not remember it next week.

So be like Vince and get that series of small things strung together.  Or, put another way by Chairman Mao, the longest journey begins with the first step.

Gotta go read that contract.

   

   

Charles Schwab Doesn't Want You

"Why don't you do a post about this?", my wife yelled.  This was a commercial.  Kind of cartoonish looking, animated commercial with a 50's something women talking about a lack of a retirement plan and no real savings.  The commercial was for Charles Schwab. 

What is a girl to do?  The answer, I guess, is to go down to Charles Schwab and they will put together a plan to get  you organized and invested and on the straight and narrow.  If future returns mirror past returns then maybe, just maybe, this babe won't end up on the street or renting out her daughter's third bedroom.  But they will also point out that past results are no guarantee of future results.  And as the lady is in her fifties then the time horizon is pretty short and she better get going.

And you did not see the ad because they run it on '60 Minutes' and golf tournaments and stuff you don't watch but people with assets do watch.  Along with the Viagra ads. 

But Charles and his bunch are not looking for you.  Because as stressed out as this lady is she probably has more assets than she thinks and Chuck wants them.  You don't so Chuck isn't pitching to you and I think that is a big mistake.  Chuck is taking a pass on you because the return is too low right now.  The future return is huge because most investors stick with their inital choices but the build up to a critical mass of assets is long and ardous and Chuck is not interested.  He wants a payout now and if he can get that lady in the door he gets an immediate return.

So who is pitching investment advice to you?  Nobody.  At least, nobody that jumps right out at me.  So let's take a look at the usual suspects and see if there is anybody out there willing to help the newly employed or recently graduated soon to be worker.

Fidelity--hmmm.  A cursory review and here is what they got and what it takes to qualify. 

"In the Fidelity Portfolio Advisory Service product, customers are invested into model portfolios of Fidelity and non-Fidelity mutual funds based on their time horizon, risk tolerance and investment goals. These model portfolios are managed by a team of investment professionals that includes Portfolio Strategists and Mutual Fund Analysts. Fidelity Private Portfolio Services offers individually customized management designed for complex, taxable portfolios. A team of Investment Managers is responsible for the individualized, tax-sensitive management of each client account. Another key distinction is that with Private Portfolio Service, assets can be transferred in-kind to open an account, unlike Fidelity Portfolio Advisory Service, which accepts cash only. Lastly, the minimum investment amount varies; for Fidelity Portfolio Advisory Service, it's $50,000 per account and for Fidelity Private Portfolio Service, it's $300,000 per account. "

So for 50 grand you get a computer program and for $300,000 you get a person or persons.  So if you got this kind of money, your problems are solved.

How about T. Rowe Price?  Has a pretty nice web site and some kind of generic allocation models based on age that is actually pretty good.  But no personalized help that jumped out at me and just checking out a couple of funds, an inital investment amount of $2,500.  Not an easy way to get started.

Vanguard?  Here's what they say.  "If you have $500,000 or more in investable assets, Vanguard Asset Management Services can address your planning needs, larger wealth management concerns, and the details of managing your portfolio. We're committed to providing you with proven solutions and exceptional service."  And a $3,000 minimum for accounts.

I love Vanguard but they are not youth friendly.

Went to Yahoo, and Myspace, and tried Facebook but they wouldn't let me in.  But I didn't see any Fidelity, Vanguard, T. Rowe Price or Charles Schwab ads at all so they don't want you. 

Who does?  I'm not sure but somebody is missing a huge opportunity.  Maybe.  But I was in finance, not marketing, so maybe the smart guys at Vanguard and Fidelity and T. Rowe Price and Schwab know something I don't.  But even if they do, it doesn't help you.

So if anybody has found some financial group that is youth friendly, let me know and I will get it out there.  If not, you are on your own so go to Category 12 and 13 to get started.

   

Tax Fact Update

Note:  Look at some other great finance blogs at http://www.fivecentnickel.com/2006/04/17/carnival-of-personal-finance-44/

and

http://www.freemoneyfinance.com/2006/04/carnival_of_the_1.html

Back to taxes.

April 17th and I'm sick of taxes but need to button this up.  The last post had some facts about the IRS but the article I included was really old.  The post also addressed an issue brought up by Anon. who maintains that 'using' the tax system invites audits.  I'm not sure what 'using' ( my term, not Anon.'s) the tax system really means but he thought some of the tax deductions I noted in my You, Inc. post would increase the chance for audit.  And he is right.  But my basic point that the tax system is not a bogey man to be avoided at all costs remains intact.  In fact, if you want to create any wealth in this world, you can't avoid the IRS and here is why.

The following facts come from a very good article in the April 16th Sunday edition of the Wall Street Journal by Tom Harmon titled What Gets You Audited (Note: It's Not E-Filing).

The IRS audited more returns in 2005 than they did in 2000 but less than they did in 1996.  In 2005 they audited 0.93% of returns versus only 0.49 in 2000 but in 1996 they audited 1.67% of returns.  Not sure what that tells you except you have less than a 1% chance of being audited.  Also, not sure about the definition of audit.  Is is the light in your face, interview your neighbors, dig up your back yard audit or merely a letter from the IRS asking to explain or justify some entry?  Maybe there is a tax attorney out there that can help.  But regardless, your chance of an audit is less than 1%.

The IRS is targeting people that make more money than most other people.  This probably comes as a shock but true.  The concept falls into the Willie Sutton school of finance.  As noted in earlier posts, Willie was a 1930's bank robber who when asked why he robbed banks, responded "Because that is where the money is."  The IRS is auditing more people that have money than those that don't. 

The IRS, according to IRS Commissioner Mark Everson, is focusing on taxpayer's with income in excess of $100,000.  The audit rate here is 1.58% which is .65% above the average.  Or not much.  The rate of 1.58% is higher than in 2000 when the rate was 0.96% but lower than 1996 when the rate was 3.21%.  Again, not sure what this tells us except that one way to avoid the IRS is to be poor.  If your wife or husband or kids or anybody, bitch about having no money console them with the fact that your chance of an audit is .65% less than the average.  I'd rather have the $100,000 and take my chances with the IRS.

Another thing they are after is off-shore accounts.  Seems like people with a lot of money are stashing things overseas.  In a previous corporate life I used to get these pitched to me all the time by our accountants and it took away from running the business.  But a lot of corporations, and a lot of individuals, did them and now they are paying for it.  Look at the Enron trial for a little insight.  So go get 'em Mark and the IRS.  I am assuming that most of you do not have massive off-shore accounts so you have little to worry about from this angle.

But the IRS is also looking into "self-employed workers and others who deal largely in cash and who file Schedule C, which is for 'Profit or Loss from Business (Sole Proprietorship)."  And this is the form that I outlined in my You, Inc. post.  Gasp.  So your audit chances go up if you do a Schedule C.  Tom doesn't give us any hard numbers here but a Schedule C gets the attention of the IRS.

And again, so what?  If you want to start a business, full or part-time, you will file a schedule C and if you file it correctly, taking the legitimate deductions and provide back-up when requested (or audited), you will not go to jail. 

Making money requires some work.  And dealing with the IRS is part of the work.  The alternative is to be poor.  No thanks. 

    

You, Inc. And The IRS

Got this from a reader regarding the post You, Inc.

'This is the absolute fastest way to get audited.'  Signed, Anon.  I assume that Anon is short for anonymous as this is what he appears to want to be.

But first, if you want to be rich or try and get rich YOU HAVE TO GET OVER YOUR FEAR OF THE IRS AND THE FEAR OF AUDIT.

Somehow the IRS has gotten a reputation second only to Freddie in those slasher movies for scaring people.  Sure, getting a letter from the IRS is no fun and I've gotten a few so I know.  But if you are going to be a good businessperson you have to know how to minimize your taxes.  If you have a business expense, deduct it.  And if the IRS asks what it is, you explain it.  If they disallow it you either appeal it or they recalculate your taxes and you pay the incremental tax and a interest penalty.  They will not boil you in oil.  Or send you to jail.  I don't think.  You go to jail for tax evasion, not disagreements on how much to pay.  If you are doing tax evasion, move to Switzerland.  Tax evasion is not illegal there which I have never understood.

My first introduction to the IRS was at work.  In the old days you could deduct sales tax but most people didn't because the guidelines said that you must keep all receipts in a box and so on and so forth.  Well, one year we spent a lot of money so I decided to look into this but I knew I did not have all my receipts so took a quick trip down to the Tax Department to see my old buddy, Phil.  And Phil was good and an ex-IRS agent.  Told him my story and half way through he stopped me and said "Here's what I do.  At the beginning of the year I take my cash and then I add my take home pay for the year and then I deduct my ending cash number.  Then I multiply that number by the sales tax percentage and I enter that number on my tax return."  What?  No receipts, no sweating the numbers, no fear of audits?  Phil continued.  "First, my chance of being audited are miniscule.  Second, my number is going to be plus or minus 10%.  Third, the agent will know that.  Fourth, the agent won't get promoted for getting an extra $50 out of me.  And fifth, I'm not going to go nuts collecting receipts all year."

I really got over the IRS when a tax attorney at another job said I had to declare on my personal tax return that I was a signer on bank accounts in foreign countries.  This tax attorney was the opposite of Phil.  Very by the book and more.  The background was that our company had subsidiaries in just about every country in the world and since I was in International Treasury there was a dumb rule that I be a signer on every account.  Don't ask me why.  And this idiot demanded that I include each country on my personal tax return.  I fought and fought and it went up the chain of command when I realized I was becoming a nuisance so I dropped it.  But my personal tax return ballooned by about twenty pages and the IRS knew I had financial dealings in every country from Afghanistan to Zaire.  And I sat back and waited for the dreaded audit.  Never heard a peep.

The lesson is be reasonable and know the rules, the general rules, and use a computer program like Turbo Tax so you don't miss anything.  And if you do get rich the IRS will be looking at your return anyway.  But so what?  It is a cost of doing business.  To maximize the utility of the tax system you have to be willing to deal with the system.  Or do as Anon. seems to be saying--here's all my money, IRS.  Take it and leave me alone.   

The following is rather bad article, and rather dated article, on the tax system.  But I couldn't find any good articles so this will have to do.  How you handle taxes is your decision but audits don't really bother me as I am comfortable defending my financial transactions.  Fear should not be the determining factor when making business decisions. 

Let's throw in the Supreme Court here as Judge Learned Hand said

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

The article.  Like I said not very good but worth reading.

Maybe you think deciphering your bookkeeping and filing your taxes is tough. Well, it is, sort of, but it's kids' stuff compared to the big enchilada: getting called on the carpet by the IRS and asked to explain and defend your tax return. (For those of our readers outside the US, the Infernal Revenue Service, our beloved tax-collection agency, is one of the gentle joys of being an American.) In all fairness, the IRS has a big job to do -- namely, collecting annual dues from those of us who work and live in the United States. Fulfilling this mission means making sure that every taxpayer pays his full share, and the IRS achieves this in part by subjecting suspicious tax returns to a careful and official review, or audit.

The IRS conducted approximately 1.1 million closed books and records audits of individual (i.e., non-corporate) tax returns in the three-year period 1992-1994, exacting from the audited individuals an average additional sum of between $2,000 and $10,000. As if having to pay the additional sum weren't unpleasant enough, people who get audited have to endure the time-consuming and aggravating process of the audit itself. And in an IRS audit, unlike in a U.S. criminal trial, you're guilty until proven innocent. The burden of proof rests with you.

The bottom line, therefore, is that you want to do your best to avoid attracting the notice of IRS agents. Unfortunately, if you file a Schedule C along with your 1040 -- as you probably do if you have 1099 income -- you're more likely to be audited than are people who only have W-2 income. (A September 1997 IRS press release, for example, notes that, in fiscal year 1995, more than three percent of all Schedule Cs reporting between $25,000 and $50,000 of income were audited, compared with about one percent of 1040A returns reporting income in the same range.)

You'd probably rather not get audited. But what, specifically, is likely to get you audited? Unless you're a masochist, you should probably take extra care not to mar your return with the following red flags:

Deductions. Although Uncle Sam allows for all kinds of deductions, his nephews and nieces at the IRS pay close attention whenever taxpayers claim them. Some kinds of deductions are more questionable than others, and the Home Office Deduction is one of the most frequently contested of all, largely because it's easy to fudge. In order to claim a Home Office Deduction, your home office must, in most cases, be your principal place of business, which means that you do most of your work there. More importantly, you have to use the space exclusively for running your business, and not for personal use as well. Otherwise the space simply doesn't count as a home office and may not be deducted as such. The rules can get pretty specific. Read IRS Publication 587 ("Business Use of Your Home: Schedule C Example) for the IRS' own explanation of what's permissible and what isn't.

Inconsistencies between your new return and last year's. For example, if you changed your name (from, say, John Doe to The Taxpayer Formerly Known as John Doe), or your spouse or your children changed their names, or if you're suddenly taking new types of deductions, the IRS is likely to notice and inquire about them.

Disagreements between your state and Federal tax returns. If you told the state treasury that you earned $50,000 last year, don't tell the Feds that you earned $52,000 or $49,000 or even $50,001. They'll wonder why you did, and then ask. The potential for discrepancies lies elsewhere as well. Remember that, as a contractor, you receive 1099s from all the people who paid you -- at least in theory. And when clients send you a 1099, they also send a copy to the IRS. If you report gross income that's less than the total amount indicated by all the 1099s submitted with your name on them, you run a high risk of being audited. (Yes, state and Federal tax authorities do share and compare data.)

Drastic changes in income. If you took in $50,000 last year, but report that you earned only $15,000 this year, the IRS will ask, "What the hell happened? Where's the money? Under your mattress? Up your butt?" Flashlight in hand, the IRS will look.

Round numbers, like "$3,000." These don't occur much in everyday life, and if your return is sprinkled with them, IRS agents will take notice.

Incomplete or sloppy returns. Don't leave any blanks where you should really leave numbers. Also, don't dash off your return with a blunt and chalky number-2 pencil; use a typewriter or a computerized tax-filing program like Intuit's TurboTax (for PCs) or MacInTax (for Macs). Otherwise you might end up translating your return -- in person.

Suspiciously low income. If your tax return indicates that you, your spouse, and four dependents live on Rodeo Drive in Beverly Hills on an income of only $18,312, agents will marvel at your ability to stretch a dollar -- and call you in for an explanation. In short, the IRS might question the accuracy of any return that shows both a low income and considerable financial obligations.

Most of the tax returns chosen for audit in a given year are chosen by a computer looking for returns likely to yield big bucks for the Federal Government, not by people trained to spot red flags, so maybe all this extra vigilance isn't worth it. On the other hand, do you really want to bet against the computers? Wouldn't you feel like an ass if you had to endure an income tax audit because you were too busy oiling your Weed Whacker to fill in the forms properly?