Tax Guru – Ker$tetter Letter

Overstating Of Assets Is Seen To Cost U.S. Billions In Taxes –  This claim that most people overstate the cost basis of their assets in order to reduce their capital gains is a load of crap; but is consistent with the Left’s propaganda that everyone cheats on their taxes. News stories like this are used to justify more IRS power. 

As I’ve constantly said, rather than underpay their taxes, most people overpay through either ignorance, incompetence (their own and their tax pros’), or a desire to just keep IRS away from them (fear).  What I have seen too many times to count are large understatements of the proper cost basis of assets, leading people to report too much taxable profit.  In fact, when I was traveling all over the place teaching my seminars to Realtors on real estate tax issues, my very first topic was the proper determination of cost basis because it has so often been done incorrectly by so many people.

Common mistakes I see all of the time include

Assuming that the cost basis of an item received as a gift is zero because the recipient didn’t pay anything for it.  The truth is that the cost basis for the recipient is the same as it was for the previous owner.

Forgetting to step up the cost basis of assets that were inherited to its fair market value as of the date of death.  I have prepared dozens of amended returns for this very reason, where the clients’ previous tax preparer used the original cost of an asset when reporting a capital gain, although there had been a death since then.  This is even more critical with surviving spouses in community property states, where the entire property’s cost basis is stepped up; not just the inherited half, as it is in non-community property states.  

I know I am a lone voice compared to the big media machine of the Left; but stories claiming that everyone cheats on their taxes and that we need a tougher more powerful IRS are completely wrong. Of course, my claim is only based on working with thousands of real people over the past 30 years.  How can that compare with ivory tower theory and distrust of the commoners by our superiors?