THE TAX ATTIC with Jerry Coon

Jerry Coon

Mitt Romney and Paul Ryan officially became the Republican candidates for the offices of president and vice president last week. Now the fun can really begin as President Obama and Joe Biden will do their best to make those two guys look bad, and Romney and Ryan will equally reciprocate.

We may look at Romney and Ryan as the conservatives and Obama and Biden as the liberals, but I think the Internal Revenue Service looks at all four of them as belonging to the “wealthy” class of taxpayers. It’s interesting that these four multi-millionaires all want to downplay their wealth. This is just my opinion, but since each of them worked hard for their money, shouldn’t they be somewhat proud of their accomplishments?

Obama has written several books that have earned him millions. You would swear he paid someone to author and publish those books instead of him getting paid. Romney has run several businesses that have earned him millions. You would think he was an assistant to the CEO instead of the CEO. Biden and Ryan both have regular backgrounds but today have nice portfolios at their disposal. However, it’s almost like not one of them can afford the taxi ride home. We know that’s not true. It’s just fashionable to behave like they are “regular” people.

They are not but let’s get back to the Internal Revenue Service’s treatment of the wealthy.

The IRS does give special treatment to wealthier taxpayers. Approximately 30% of all taxpayers with earnings of 10 million dollars or more are audited on an annual basis. I would say that when Mitt Romney says he paid 15% in tax, there would probably be a good chance that he could produce an IRS audit that confirms that figure. Comparing that 30% figure to the 1.1% of taxpayers overall that are audited gives you an indication of just how special the IRS figures the wealthy are. Taxpayers with incomes of between 5 and 10 million dollars are audited less frequently; 20.75% are audited on an annual basis. Taxpayers with earnings between 1 and 5 million dollars are audited 11.8% of the time. That is still substantially more than the 1.1% overall audit figure.

All of these audits take place because two of the functions the IRS is charged to fulfill are worth discussing.

First, they are a collection agency that collects tax money from all of us. Last year they collected 2.4 trillion dollars in various taxes.

Second, they have a compliance function. The audit division fits into this function. The IRS also mails out millions of notices annually as they compare the information on tax returns to the information reported to them by the various payers. Ultimately, the experts project that the amount of money the IRS should be collecting is really 2.85 trillion dollars. They have a shortfall of 450 billion dollars. This difference is commonly called the tax gap.

The tax gap seems to get wider in tough economic times because the underground economy flourishes more in tougher times. I think the current economic conditions qualify today as being a tough time.

The IRS uses audits and compliance letters to bite into the 450 billion short fall. It’s an effort to ensure that everyone should be paying their fair share.

My definition of a fair share is whatever the person’s tax computes to be using all of the legal deductions that apply to them. I don’t really care if Joe Taxpayer pays 2% or if Mitt Romney pays 15% while President Obama pays 26%, as long as they are all using the legal laws of the land. We should work to change the laws if the thinking is that 2% or 15% is too much or too little or 26% is too much or too little.

It will be interesting to see, though, what happens after this presidential election. There will be tax law changes regardless of who wins the election and it’s my guess that both Romney’s and Obama’s tax rates will go up. It’s almost guaranteed that the wealthy will pay more. Joe Taxpayer might actually still pay 2% for now, but even that could change in the future. This is Jerry Coon signing off.

 

Jerry Coon owns Action Tax Service on Northland Drive in Rockford. He is an Enrolled Agent and a Registered Tax Return Preparer. Contact Jerry through his website: www.actiontaxservice.com.

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