Is Saving Taxes Worth the Trouble and Cost?

There are a lot of people who are eager to help you to pay less taxes.

There are the stock brokers who are selling tax exempt bonds or the insurance agents who are pushing tax deferred annuities. Real estate sales people are quick to remind you that you get lots of deductions when you own a home and that you can make up to $250,000 of gain on a personal residence that is tax free. Sales people who are involved in one of the dozens of multi-level marketing programs will point out the variety of tax breaks that you get from owning a business. Financial planners will often offer to show you enough tax saving opportunities to more than cover the cost of their fees. Tax preparers often offer to help you save taxes by finding over-looked deductions. Lawyers often encourage you to prepare an estate plan in order to avoid federal estate taxes.

But many of these promoters are slow or reluctant to explain the downside to their tax saving tactics. With very few exceptions, there is another side to every coin that represents some kind of tax saving opportunity. And it's not just the potential risk of a dispute with the IRS. The hidden downside is the time and the opportunity cost; it is the alternatives that are not utilized.

First of all, there is the cost of hiring the professional or the hidden risks involved with whatever investment they are promoting. For example, tax exempt bonds rarely pay as high a yield as U.S. government or corporate bonds. Thus, the difference in the yield is like a hidden tax. When a U.S. bond is paying 4% and a tax exempt bond is paying 3%, that's equivalent to a 25% tax rate. And exempt bonds are subject to unique market risks that require expertise to evaluate. An annuity might be a simple way to reduce your taxable income in some circumstances, but the return on your investment will be fully taxable, even if the annuity was receiving income from long term capital gains or tax qualified dividends. In effect you would be trading a potential tax rate of 15% (or even zero %) for 25% or more.

Financial planning and estate planning might result in a net tax savings over time that is in excess of the fees you will be paying to the professional. But don't overlook the time you will have to invest to engage in the process -- which will require you to gather and organize a LOT of your personal financial records and information.

I have seen very few tax saving opportunities that were not without some cost in time or money that reduces the payoff. Clearly, the goal is to find those particular opportunities that are suitable for you and that provide a payoff that is greater than the costs -- including the hidden costs.

Vern Jacobs
http://taxangles.blogspot.com/

IRS Propaganda and Disinformation

Have you read "1984" by George Orwell?

If not, it's worth getting a copy from Amazon.

For those who haven't read the book it describes a world where there are three main political units which are in a perpetual state of war. The European and U.K. government engages in extreme disinformation by twisting words and phrases to mean the opposite of their original meaning.

What's the got to do with the IRS?

Back in the late seventies I wrote about their propaganda and disinformation tactics and since then they have only gotten more skilled in the practice.

Everyone is familiar with the "voluntary" description of the income tax. IRS officials and politicians repeatedly refer to our tax system as being voluntary. But when pressed, the IRS explains that our tax system gives taxpayers the right to self-declare their income rather than having the IRS compute their tax. What they don't tell us is that if we don't "volunteer" we are not only subject to whatever taxes the IRS might impose (based on information returns of various kinds), but we will also be subject to some nasty penalties and interest.

If you read their instructions, you will encounter an extreme use of such words as "must", "required", "does not", "may not" and "shall not". Instructions and information that will increase your tax liability are stated in the most forceful and authoritative terms and in a negative context. References to penalties for non-compliance are used frequently.

Even when the IRS regulations and instructions are discussing some provision of law that explicitly permits taxpayers to do something to reduce their taxes (like investing in an IRA, claiming a deduction for business equipment or investing in tax-exempt bonds), the emphasis is about what must be done to qualify for the tax break. In many cases, their explanation of tax saving provisions of the tax law are so negative that they create the impression that using the break would be risky.

Each year, in the early Spring, the IRS begins a media publicity blitz with news about the successful conclusion of various court cases against tax evaders. As much as possible, they publicize criminal charges and jail time for highly prominent persons. The author of "The April Game" (an un-named former IRS agent) says that the conclusion of fraud cases are times to gain maximum publicity value.

Another tactic is to convince us that they can catch every tax cheat and tax return error. The truth is that only about 1% of all the returns are audited, and that only about 1 out of 200 returns of middle income taxpayers are audited.

Few taxpayers are familiar with the arcane language of the tax code and the IRS regulations. Since the income tax is based on income, it is necessary to have some understanding of what that means. However, the term is not defined in the tax code because it is such a broad and elusive concept. Without some education as to the meaning, most taxpayer will assume that every form of cash receipt is income. That's not true, but you will have a hard time finding any admission of that fact in the tax law or the IRS regulations or voluminous instructions.

To counter the IRS propaganda, taxpayers who do not have any training in the subject of accounting or tax law may need to secure help from someone who does.

To be Continued

Vern Jacobs

www.vernonjacobs.com