Speaker Kevin McCarthy tweet:
“House Republicans just voted unanimously to repeal the Democrats’ army of 87,000 IRS agents. This was our very first act of the new Congress, because government should work for you, not against you.”
I pay my taxes. I want other people to pay theirs.
In the debt-crisis deal worked out between President Biden and House Speaker McCarthy, Republicans got some of what they wanted, a cut in funding of the IRS. They had campaigned on the fear that more Americans would be audited. It turns out that the IRS is able to move some money around administratively, so most of the planned replacements will take place after all. Both sides can claim they won. This is why legislation is called "sausage-making."
I am happy the IRS will be stepping up audits. I am not afraid of them. I want tax cheats to be afraid of them.
Foreground vineyard. In back, the rental house. Two sources of complications.
Today's post is part one of two. Today I describe my own experience with the tax code. Tomorrow I will share some statistics about the value of there being a credible chance that a person will be audited. Spoiler alert: People do a better job of filing a legal tax return if they think they might be audited.
The system of recording wages and withholding taxes works well for most taxpayers. The website The Hill reports:
Different parts of the economy are compliant with tax laws to different degrees. Workers and employees are the most law-abiding segment, reporting their wages and salaries with 99 percent accuracy, while business owners are far less tax law-abiding.
Among the least compliant sectors are farmers, whose income is subject to “little or no information reporting,” according to the IRS. Sixty-four percent of all farm income is misreported to the IRS, while business owners in sectors other than agriculture report their income with only 43 percent accuracy.
I thought I was a knowledgeable taxpayer. I had the normal tax experience of a two-income American household, mostly earned income reported on a W-2 form, with a little side-business growing melons. Then I decided to put in a vineyard, which increased the scale of my farm operation. I entered a whole new world of tax complexity. As part of this transition I also made a rental house out of the place my grandparents built 100 years ago. These gave me new insight into the complexities of tax deductions and income sheltering. It is amazing to me what is completely and totally legal. Farms and real estate investments have the effect of sheltering (i.e. not paying taxes on) current income and turning tax deductions into capital investments. Investment gains will be realized (i.e. paid taxes on) at a lower rate, and probably never. When people die the government will "step up" the value of the farm and farm house to its value at my date of death, thus escaping taxes on the gain in value. And, at Republican urging, the limit before heirs pay federal inheritance taxes, which might capture that gain, has been raised to almost $13 million per person, $26 million per couple, far, far beyond my situation.
What a deal.
There won't be revenue from the grapes for four or five years, so I don't have income to worry about for a while. In the meantime, I have a complex array of deductions. Some farm equipment and buildings depreciate over five years. Some over seven years. Some over 27 years. There are special depreciation rules for vineyards, which accelerate realization of deductions. Did you know that irrigation equipment for the vineyard which is visible above ground (sprinkler heads) depreciate at a different rate than irrigation lines that are buried? I didn't. Live and learn. There are distinctions between improvements to the rental house. Some can be expensed and are deductible this year against rental income, i.e. replacing the dishwasher. The cost of replacing the gutters is handled differently, a capital cost that is depreciated along with the house. I am just reporting what I think I have learned. Don't take tax advice from me. My CPA handles the details. I show him the receipts and tell him what they are for. There are lots of receipts.
Tax compliance on these two small businesses is an entirely different realm than getting a W-2 form at the end of January and paying taxes on the income. It is eye-opening. The rules are complex and the expenses open up a gray area, and much of this is self-reported. There isn't anyone looking over a farmer's shoulder counting the hay bales that come off an alfalfa field. I gathered lots of receipts for pipes, posts, and trellis wire, to bring my CPA, but there is no automatic third-party mechanism to know or check if they are legitimate. It disappoints me, but does not surprise me, that self-reporting of expenses and income is a primary arena for tax cheating.
By fiscal year 2022, budget cuts had left the IRS with only about 1,400 staff-years of revenue-agent time to apply to the 165 million income tax 1040 returns. Fewer than 2% of the returns of millionaires are being audited. We don't know how big the gap is between taxes legally owed and taxes in fact collected, but estimates range at about $400 billion to $700 billion a year, about 15% of the owed taxes. Conservative media expresses shock at people entering stores and openly shoplifting. I am shocked, too. Where are the security guards? Where are the police? Why aren't these people being prosecuted?
But that is small potatoes. The real money being stolen is being done under the nose of the IRS. The GOP needs to own the fact that they are enabling millionaires to steal, because it is on larger, more complex returns, that there are such opportunities for mischief. Republicans have defunded the police.
Tomorrow: The statistics on tax audits. Another spoiler: To paraphrase Willie Sutton on why he robbed banks. Go where the money is.
What the heck Kev? He sounds like he is for people not paying their taxes & it's just people like him who work in politics that are apparently afraid of paying their taxes. The demolishment of the gop is almost complete as the majority seem to be people who think that they are above the law.