Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for May, 2004

Posted by taxguru on May 31, 2004

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Posted by taxguru on May 30, 2004

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Posted by taxguru on May 30, 2004

Consumption taxes are not the answer – Bruce Bartlett’s take on two different ideas; John F. Kerry’s desire to increase the tax on gasoline by 50 cents per gallon; and replacing payroll taxes with a national sales tax.

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How do we get those ideas?

Posted by taxguru on May 30, 2004

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IRS Audit Changes

Posted by taxguru on May 30, 2004

Except for a few short interruptions, I was able to see and hear most of the IRS webcast a few weeks ago on the changes to their audit procedures. While I had the show on one of my three computer monitors, I typed up a few notes on another; but have been too busy to flesh them out enough to make any sense to anyone else but myself.

There weren’t as many changes announced as I had expected, but I did want to mention the following quick observations, which by no means include everything covered during the broadcast. The entire program has been posted to the archives and is available for viewing at everyone’s convenience.

They are trying to have a more professional relationship with their “customers” (taxpayers and their representatives). This will include presenting an Engagement Agreement between the auditor and the rep to lay out the audit plan, along with an expected conclusion date. They had to admit that the reality of knowing with any certainty how long an audit would take up front is pretty close to unknowable. They admitted that their most lucrative findings (aka big bucks for Uncle Sam) come about from issues that are accidentally discovered during the audit and not from the items spelled out in the initial audit request.

Approximately mid-way through the audit, the auditor is supposed to assess things and decide whether to expand or drop the audit.

Audit manual with new procedures will be available online to practitioners.

High priority audits include tax avoidance promoters and their clients.

High income = high risk. $250,000 and up of income.

They made the same bogus and completely unsubstantiated claim that two thirds of the tax gap is from unreported self employment income. As I’ve mentioned several times before, I have attempted to track down the source of these statistics from IRS big-wigs and they admitted to me that they are using WAGs (wild ass guesses) in a blatant attempt to scare up more budget money from our rulers in Congress. Since the real tax gap numbers are by definition impossible to ascertain, their fabricated figures are technically just as good as any.

They have a top secret scoring model with four filters to assess risk, including:

High income, non-filers.

UI (Unreported Income) and – DIF (Differential Index Function) filter. Unreported income. Finds a lot of businesses and high income persons.

Many layers of entities. This has long created suspicion with IRS. They often suspect that this approach is just used to cheat on taxes. However, the truth is a bit different. While using several layers of partnerships, trusts, LLCs and corporations can help reduce taxes, I find it even more useful for preserving privacy and protecting against frivolous lawsuits. The tougher you make it for ambulance chasers to sue you, by operating behind layer upon layer of entities, the less likely they are to take on a contingent extortion case.

About a week after this IRS web seminar, I spent most of the day with an IRS auditor in my office and we had a chance to discuss the subject of these new procedures. She agreed with me that the agreed commitment date they come up with in their engagement agreement is, by necessity, pulled out of the air because nobody has any idea what new issues they may stumble across during the examination.

You Get What You Pay For

Although I have worked with dozens of different IRS agents over the past eleven years since relocating to the Ozarks, this was my first case with this particular woman. She asked me an interesting question. How would I compare the quality of the IRS agents I have worked with in this part of the country with those I had worked with back in the San Francisco Bay Area? Anyone who knows me knows that kissing butt, especially IRS fanny, is not part of my MO. However, in an honest reflection of my 29 years working with IRS employees, I realized that there has been a stark difference in their quality between here and back on the Left Coast; and I know exactly why.

One of the big problems IRS has when recruiting new employees is their pay rates. They are pretty much the same across the country. I can still recall when I was getting ready to graduate with my Bachelors degree in Accounting in 1977 and checking the employment opportunities. There were three main categories of prospective employers; Big Eight CPA firms, corporations, and the government. I can remember the IRS recruitment forms, where they laid out all of the criteria they desired. They wanted the best of everything. However, when it came to the salary, they were offering about one third of the starting pay for corporate accountants and a bit less than the Big 8 firms.

To put the CPA firms’ pay scales into perspective, they were able to offer very low starting salaries because, in California, prospective CPAs were required to have at least two years experience as employees with a CPA firm. Anyone who aspired to becoming a CPA had to be willing to work for very low pay in order to obtain the appropriate on the job work experience. My starting pay, with the small CPA firm I worked for in Hayward after graduating, worked out to five dollars per hour.

That salary disparity persists to this day. In the Bay Area, IRS can still only pay a fraction of what other employers can. In lower cost parts of the country, such as here in the Ozarks, the IRS salaries are pretty much the same as in the Bay Area. However, they are much more attractive and in line with the pay rates being offered by other kinds of employers. It doesn’t take a NASA scientist to see how IRS would be much more able to attract a much higher caliber of employee here than out on the Left Coast. The effects of this have been very obvious.

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DemonRat Economic Philosophy

Posted by taxguru on May 29, 2004

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Posted by taxguru on May 29, 2004

Farm Subsidies for the Rich, Famous, and Elected Jumped Again in 2002

Woman Gets Fake $20 From ATM – You would think that banks would run their currency through counterfeit detection scans before loading up their ATMs.

What’s Your ‘Amt.’ Under the AMT?

Flat Tax Fills Coffers In Russia – A few years back, Russia did something that many of us have been advocating for a long time here in the USA. They set income taxes as a flat percentage rather than use the Marxist “progressive” rate structure that punishes achievement. As would be the case here in the USA, such fairness actually results in more money for the government. It is still going to be a hard sell to the millions of people who thrive on class warfare and stoking the “hate the rich” fires to expect any such common sense in this country any time soon.

Productive Tax Cuts

President Requests “A Zillion Dollars” – The way our rulers burn through trillions of our dollars every year, with no control over them by Bush, this isn’t that crazy a statement.

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Posted by taxguru on May 28, 2004

How high can they go? – As much as I’ve always believed in real estate as the most dependable investment, it’s still important to buy wisely and avoid getting caught up in feeding frenzies that will sooner or later end.

Increases in User Fees May Tarnish Ehrlich’s Anti-Tax Credentials

A boom with legs – The worst news for the DemonRats; a good economy that can’t be exploited for their Big Government programs.

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Relative Prices

Posted by taxguru on May 27, 2004

I have long ago grown tired of the endless comparisons of the price per gallon of gasoline with what people routinely pay for other liquids, such as coffee, milk and bottled water. Such comparisons would actually be relevant if we bought coffee, milk or bottled water 20 gallons at a time. The fact of the matter is that we buy and consume fuels in much larger volumes than those other things; so the effect of the huge price increases is more staggering.

Although worrying about the truth has never been a high priority for the Bush haters, their claim that the Iraq war was all about oil has obviously been proven to be as bogus as all of their other spurious charges against the President. In spite of what the elite media want us to believe, Bush is a very intelligent man and knows all too well that two of the biggest influences on the economy are interest rates and the price of fuel. It is most definitely in the best interest of his reelection to keep both of those as low as possible. To claim that he wants high fuel prices to enrich his oil buddies (and in the process destroy the national economy) is completely idiotic.

Update on the IRS Front: There is still no mention of an increase in their per mile standard rate.

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How CPAs Celebrate

Posted by taxguru on May 27, 2004

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