Sunday, April 27, 2008

Don't Mess with the IRS

Younger folks out there might not remember the complete story about Al Capone but one thing everyone should keep in mind is that when no other government agency could make any criminal charges stick to good old Al, the IRS came to the rescue. Yep, Big Al killed lots and lots of people but he went to jail for tax evasion.

How you ask! Well, he didn't pay taxes, claiming not to have any income - yet, had villas and other assets that told a different story.

The IRS has always had the ability to track money to a certain extent and today the agency does this better than ever with the help of computers and other modern technological advances. What is not well known is the fact that the IRS has the ability and the authority to do what are called life-style audits. This is basically what they used to get Big Al.

The main premise of a life-style audit is that your life style should reflect the income claimed on your tax return. In other words, if you are living high on the hog and claim small amounts of income or no income on your tax return, then the IRS can use this as a basis for conducting an audit and collecting taxes.

There's a big difference between supporting a dependent - whether that person is a relative or not - and giving someone large sums of money or expensive gifts with whom you do not have a legitamate tax relationship. If you exceed the gift tax threshold then the gift giver must file a gift tax return. In 2008 that threshold is $12,000 and this is now being indexed for inflation. For decades the threshold was $10,000. So, the Big Als of today can't have anybody give them large sums of money - at least not legally - without taxes being paid. For more information go to www.irs.gov and either search on gift tax or refer to Publication 950.

Now remember I said legal. If politicians pass tax laws that favor the rich, then the rich can then legally pay less taxes. But they'd better keep it legal or they too are subject to the long arm of the IRS auditors.

For a modern-day example just look at the situation that the actor Wesley Snipes now finds himself in. He will be serving 3 years in jail for his misguided attempt to pay less taxes. His co-defendents have also been charged and sentenced. For more information on this story go to:

http://www.usatoday.com/life/people/2008-04-24-snipes_N.htm

So, at a time of looming deficits, politicians not wanting to raise taxes but bring in more money, you can bet your next pay check that the IRS is and will contintue to be more aggressive in collecting unpaid taxes and that Congress is making sure the agency does so.

Every writer should make sure they show due deligence in paying the taxes they are legally requried to pay and none of us is exempt from an audit. In fact, as writers we are more vulnerable to an audit because of the nature of our income and how we have to deduct our expenses. Unlike an employee whose employer provides a form of verification for the IRS, writers are essentially small businesses (or hobbies) and their income/expense records are primarily verified through IRS audits.

There's also the issue of the Tax Gap that has everyone in Congress excited about collecting more taxes without raising taxes. For a discussion of what the Tax Gap is please see my article at the following link:

http://www.helium.com/items/956548-theres-phrase-congress-legislators

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