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The IRS Targets Income Tricks

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Re: The IRS Targets Income Tricks

#31

Post by detst »

cd34 wrote: post #26
tptacek wrote: post #19

Earlier quoted context omitted.

I upvoted you; you clearly know more about taxes than me. However, let me chime in again here and say that the feast-or-famine thing seems overblown. The IRS isn't dinging you for miscategorizing income; it's dinging you for underpaying taxes. You can make your income as irregular as you'd like, as long as you end up paying what you owe.

If your income fluctuates based on profit and the IRS deems that a dividend, then, you are charged at the dividend rate rather than the personal tax rate. That dividend tax rate is higher than your income rate until you hit $373k annual salary in 2011/2012, and yes, you would get hit for underpaying taxes. http://www.irs.gov/businesses/small/article/0,,id=101038,00.... Publication 535, mentioned further down under re…

> That dividend tax rate is higher than your income rate until you hit $373k annual salary in 2011/2012

It was my understanding, confirmed by your link, that dividends are either taxed as ordinary income or at a maximum of 15% in case of qualified dividends.

You seem like you know what you're talking about so am I missing something?

Re: The IRS Targets Income Tricks

#33

Post by JeffL »

tptacek wrote: post #18
ams6110 wrote: post #17

There is so much "waste motion" expended in trying to game the tax code in so many situations... what could creative people achieve in that time if they didn't spend it that way. We need a vastly simplified income tax code... I'm talking throw it all out and start from scratch. Or replace it with a national sales tax, rebating some amount to make it less regressive.

This implies that if you simplified the tax code, people would stop gaming it. The opposite is probably true; the simpler you made the tax code, the more accessible tax games would be to average taxpayers.

I don't agree. In order to game, there has to be different rules to take advantage of. The fewer and simpler the rules, the less you can manipulate it. Take sales taxes, for example. You can't really game them. You can evade them, but not really game them, although I suppose mail ordering things from another state could qualify, but that's an issue of jurisdiction.

Re: The IRS Targets Income Tricks

#35

Post by notauser »

johnwatson11218 wrote: post #30

Can anyone comment on how personal income tax is handled in other countries? I don't mind paying tax but I hate the fact that I can take my paper work to several different tax preparation services and get different tax bills. In some cases I have heard of people owning the IRS thousands, going somewhere else and claiming a refund. Is the US the only country in the world where 2 to 3 percent of our GDP goes into tax p…

In the UK personal taxes are generally automatically handled by the employer. You just get the post-tax income transferred into your bank every month, and a payslip showing the deductions that were made.

(Outsourced PAYE administration costs about £20 per month for a very small company.)

It gets more complicated when you can't do taxes through PAYE for any reason - unearned income, dividends, directorships etc.

My own taxes as a director of two firms subject partially to mandatory PAYE on some of my income are a US-level nightmare and once you are out of the 'simple system' getting back into it takes years.

Re: The IRS Targets Income Tricks

#36

Post by jrockway »

JeffL wrote: post #32

Seems like if we just had a large sales tax, rather than income taxes, none of these things would be so complicated, and we'd save so much money on the cost of compliance.

A large sales tax is an unfair tax on the poor. Why should people making $20,000 a year pay the same tax on their groceries as someone making $1,000,000 a year?

Re: The IRS Targets Income Tricks

#37

Post by rubyrescue »

patio11 wrote: post #6

Small businesses are somewhat notorious for aggressively interpreting the tax code in one's favor, largely because they have a variety of options for doing so not available to the W-2 employee. The game theory sort of incentivizes it, too: heads you save 100% of the taxes at issue, tails you have to pay the taxes at issue and (if you had any sort of a good faith case) only interest at a below-market rate on them... a…

i just realized the both of us need to start an american-expat-tech-entrepreneur-tax forum. a few other people are in the same boat and email me based on my profile from time to time. I find i know much more about IRS tax code regarding form 2555 than most US accountants because they just don't deal with it much, OR, the ones that have charge way more than I can afford to help me with my questions - but i haven't found a place to discuss these type of issues online. perhaps a google group?

Re: The IRS Targets Income Tricks

#38

Post by detst »

jrockway wrote: post #36
JeffL wrote: post #32

Seems like if we just had a large sales tax, rather than income taxes, none of these things would be so complicated, and we'd save so much money on the cost of compliance.

A large sales tax is an unfair tax on the poor. Why should people making $20,000 a year pay the same tax on their groceries as someone making $1,000,000 a year?

Don't tax groceries as is already the case in many states.

Re: The IRS Targets Income Tricks

#39

Post by camz »

I'd like to clarify the issue. Personally, I think that the CPA in question in the article is an idiot for a number for reasons. (1) He's an accountant so he should've known that playing this game with the IRS as a CPA is begging the IRS to slam you. (2) Litigating a losing position like this so publicly is going to kill your reputation and put you on the IRS' top 10 favs list for life.

This is a very clear issue actually and I'm not sure why there is so much confusion and I'd disagree with calling this tax plan a "trick."

It is a legally sound tax plan with a justified theory. You are allowed to exempt a portion of your income from payroll taxes because they are "corporation distributions." Corporate distributions or dividends are not taxed as earned income because they are considered passive investment income. An S-Corp is a corporation that abides under a specific subset of rules within the IRC's Corporation Regulations, thus it is for all legal purposes a regular corporation with certain special rules.

A reasonable salary is a fairly straight forward question. The IRS won't nitpick with you on silly numbers as long as you fit within the range. Obviously, for every position there is a high and low salary range, so as long as you fit within that range the IRS will leave you alone.

The CPA is an idiot because he underpaid himself below market rates to the point where he couldn't justify his position under any reasonable defense.

If you were developer, then you would be paid anywhere from 40k to 250k+ depending on your company, position and experience. Thus, you could potentially pay yourself 40k in reasonable salaries if you owned an S-Corp and take the rest as a dividend. As long as you are able to provide "comps or comparable salaries" to positions with equitable responsibilities and experience in your local region.

The important thing to remember is to be reasonable.

I'm a full-time tax accountant, so this is coming from years of experience in the field with direct contact with auditors from the federal and state levels. They won't come knocking unless you were being a greedy idiot because like the article states it's expensive for the government to audit someone, so when they do audit you it has to be a profitable venture (thus, they usually audit the sure-thing losers).

Re: The IRS Targets Income Tricks

#40

Post by jrockway »

detst wrote: post #38
jrockway wrote: post #36

Earlier quoted context omitted.

A large sales tax is an unfair tax on the poor. Why should people making $20,000 a year pay the same tax on their groceries as someone making $1,000,000 a year?

Don't tax groceries as is already the case in many states.

So all poor people are allowed to do is eat? That's worked really so far...
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