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.