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The IRS Targets Income Tricks

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Re: The IRS Targets Income Tricks

#41

Post by alanfalcon »

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?

That's why nobody would set it up that way. The government (in this scenario) could afford to send cash money to all households to cover the tax cost of food and minimal living expenses such that the only taxes paid are for expenses beyond that minimum. A large sales tax would actually work out very well and be rid of the complexities of the IRS completely. I'd encourage anyone curious about how this would work (regardless of your initial reaction to the idea) to check out the reading material on http://www.fairtax.org/ .

Re: The IRS Targets Income Tricks

#42

Post by patrickgzill »

Aside (but relevant): some countries have as an explicit rule, that if you get a letter from the IRS on an issue, both you (as someone who has to comply with the law) and the IRS itself, is bound by the interpretation that is given.

In the USA, even if you get a private ruling, the IRS can decide to renege on their advice at any time, and investigate you and charge you, making you pay penalties and fines for following their own advice.

These ambiguities and "tricks" could be cleared up with simple guidelines backed up by such private rulings; however that would not be in the best interest of our "gotcha now!" system of taxation.

Re: The IRS Targets Income Tricks

#43

Post by detst »

jrockway wrote: post #40
detst wrote: post #38

Earlier quoted context omitted.

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...

I'm not advocating replacement of income tax with higher sales tax; just answering your question.

I wouldn't consider myself the most knowledgeable on this issue but I think there's an argument for a system that doesn't tax certain basis necessities and offers compensation to the poor to allow for more than just an existence.

Re: The IRS Targets Income Tricks

#44

Post by po »

rubyrescue wrote: post #37
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 fou…

Please do. I would join it in a heart beat.

Re: The IRS Targets Income Tricks

#45

Post by tbrownaw »

JeffL wrote: post #33
tptacek wrote: post #18

Earlier quoted context omitted.

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.

> I suppose mail ordering things from another state could qualify

You're supposed to pay "use tax" on those, which for some reason is always equal to the sales tax you think you avoided. So it's still evasion rather than gaming.

Re: The IRS Targets Income Tricks

#46

Post by hugh3 »

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.

Which is why you simplify it in such a way as to make tax games impossible.

Here's my favoured solution: the US Government spent $3.6 trillion this year. There are 280 million people living there. Therefore, Federal tax should be a flat $12,857 per person.

For the average income earner, this is about the same as they're already paying. For those earning more, they find they're incentivised to work harder, since every dollar they earn beyond that point is entirely their own. And for those earning less... well, it's the kick in the butt that they need to start working harder too.

Not too easy to game that system, is it?

Re: The IRS Targets Income Tricks

#47

Post by gyardley »

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?

Because they get the same services from the government as the person making $1,000,000 a year?

Re: The IRS Targets Income Tricks

#48

Post by tptacek »

jrockway wrote: post #34

Wow, a mandatory minimum wage for professionals. I estimate that this will last for about ten more minutes.

It's not a "mandatory minimum wage". Stop trolling. You can pay yourself $0.50/yr if you'd like; you just can't do it will paying yourself tens of thousands in distributions.

Re: The IRS Targets Income Tricks

#49

Post by jhancock »

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…

Your position is certainly how things have been for the last 15 years or so. Recently, the IRS is more apt to provide penalties and pretty high interest for perceived underpayment and its your task to prove "good faith" after you've coughed up the fees. This can get costly. Additionally, the IRS doubled its auditors in 2010. Best to ensure your 2555 exemption stays tight as there are few other rocks to hide under these days for anyone but the very wealthy.

Re: The IRS Targets Income Tricks

#50

Post by cd34 »

detst wrote: post #31
cd34 wrote: post #26

Earlier quoted context omitted.

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?

If I recall, a qualified dividend is taxed as a capital gain - 15% for long term (> 12 months), 35% for short term based on the length of time you held the security/shares in startup/corp/whatever. A non-qualified dividend is taxed at your base tax rate. Bear in mind that a dividend can alter your base tax rate, which affects contributions you may have made throughout the year. So, if you were in the 15% bracket and because of this payment get pushed into the 33% bracket, not only do you need to compensate for the cash received, but, the potential tax liability from your new annual base.

If you are given shares in a company after the initial date, I don't know if that resets the calendar, prorates it, etc.

In my case, as the sole shareholder of a closely held Maryland S-Corp, the IRS deemed the cash payment to be a qualified dividend from a company that was 7 months old, therefore, 35%. Overall, it took roughly 2.5 years and about $7k in accountant fees to reconstruct my bad bookkeeping and deal with the IRS, $1.5k in interest and penalties for an unpaid $2100 tax liability.

Again, if your income ever goes crazy for whatever reason, talk with an accountant.

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