Tax Guru – Ker$tetter Letter

Having It Both Ways

About four or five years ago, I was starting work on earning my securities licenses so that I could share in the big bucks investment advisors were making. I had to drop it when I became far too busy to handle those projects I already had. While I missed out on the fees from the booming stock market, his has worked out well. As this story shows, everyone was as happy as could be while their portfolios were rising in value. However, when things turned sour, they started looking for someone to blame and cover their losses.

While I have no doubt that there were some stock brokers using the classic account churning techniques to generate commissions, many of the investors suing their brokers are just sore losers who don’t want to pay the price for their own risk taking. It’s really just another example of people refusing to suffer the consequences for their actions, such as suing McDonalds for making them fat.

KMK

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AMT Sneaking Up On More Taxpayers

This is very true. There are more and more cases where I have actually had to back off claiming legitimate deductions on clients’ returns in order to reduce or eliminate the AMT and achieve an overall lower tax bite. That’s not a problem for IRS because they aren’t in the business of telling people that they didn’t claim enough deductions.

One of the more extreme examples of the AMT kicking in was with a client who went from being a Schedule C self employed independent contractor (IC) to a W-2 employee. By moving the exact same amount of his unreimbursed expenses from Sch. C to Sch. A, the AMT kicked in, for several thousand dollars of additional tax than if he had remained as an IC. How does that make any sense?

Reform AMT is still the most vocal and active group working for a change in this insidious tax.

KMK

IRS Penalty Notices

It’s time for a refresher on how to deal with notices from the IRS and State tax agencies claiming that a penalty should be applied or another change needs to be made to a recently filed tax return.

The first thing to remember is that, contrary to popular belief, IRS and State tax agencies aren’t infallible. They make mistakes. I don’t mean to burst anyone’s illusions, but more times than not, notices they send out are either completely or partially wrong. I’ve never done a scientific study; but at least 75% of the notices I have reviewed have been seriously in error. Who knows how much money they get from people who are either too scared to question the IRS’s accuracy or simply labor under the misconception that they are always right. So, before sending off a check, have your tax pro check it for accuracy.

If, as it usually is, there is an error in the notice, write to the IRS or State and explain the error. The first letter doesn’t always do the trick. It then becomes a game of bluff. I have often seen IRS and States deny a waiver request, only to accept it after sending the exact same letter back a second or third time. If you know that you are right, do not give up at the first level. Write to the Taxpayer Advocate’s office next. If all else fails, contact the local office of your elected officials. They have staff designated as liaisons with the tax agencies.

I have often heard IRS personnel suggest that you pay the bill and then request a refund. That is the absolute worst thing you could so if you feel you are right that you don’t owe the money. Do not ever send in any payment for a tax penalty that you are not positive that you owe until you have exhausted all appeal options. On far too many occasion, I have found that they use any prepayment as an admission of guilt, reducing the chance of recovering the money to almost zero. You completely lose all negotiating power once they have your money.

Many people panic over the deadlines given in penalty notices and worry that they will be hauled off in shackles if they don’t pay the bill by that particular date. Those dates are just arbitrary ones and, if you don’t truly owe the money, mean nothing. You may receive a follow-up notice if they haven’t heard back from you by that date, but nothing serious.

Again, contrary to popular belief, penalties are negotiable. Interest charges on late payments are not. However, if you can explain why a penalty should be removed, it and the interest on the penalty will be taken off the bill, normally making a sizable dent in the original amount requested.

KMK

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Budget Bloat

As Stephen Moore points out, our GOP controlled DC ruling bodies are losing the battle against big government spending. A 50% increase in the Federal budget doesn’t make their claims of fiscal control and smaller government very credible. Our chances of ever seeing our tax burden decrease drop off in direct proportion to the growth in the Federal budget. GOP pork is just as expensive and irresponsible as that doled out by the Dems. The National Taxpayer Union is just as upset over this as Stephen Moore and I are.

I do take exception to the connection that NTU and everyone in the mainstream media make between tax rate cuts and the deficit. As proven by the Reagan tax rate cuts, lower rates produce more revenue. Deficits are a direct result of uncontrolled spending, just as they were in the 1980s and 90s. Every time you see someone try to blame deficits on tax rate cuts, you need to realize that person is either an idiot, a liar, or more likely both, and definitely not to be trusted.

KMK

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