A recent article in The New York Times took a look at a new tax scam sweeping across the U.S. I was interested in the story both in substance and for what it says
about American attitudes toward taxation.
Tax People is a new organization teaching taxpayers how to become non-taxpayers by setting up a home business and claiming dubious deductions relating to that
business. The organization teaches you how to convert many, if not most, of your personal expenses into tax deductions by claiming they relate to your “home
The cost of this education is $300 down and $100 per month forever.
By joining, you become a tax consultant and earn commissions from selling the plan to others. This is your home business and the fountain from which a multitude of
tax deductions flow.
Company literature indicates that every trip you make now becomes a tax-deductible excursion since you could conceivably meet prospects at the grocery store,
church, on vacation or out in the woods hunting. You can hire your children to clean your home office and reward them with a tax-deductible college education as an
employee fringe benefit.
In response to the tax provision that requires that a business report a profit every three or four years, the Tax People have a canned response. Change businesses
every three of four years to another losing business and start the IRS time meter running all over again.
Nifty, huh? As absurd as all this sounds, they claim a membership of 50,000.
It is obvious that these folks have spent time and effort to bend the tax code in directions it was never meant to go. They even offer representation before the IRS if
your deductions are challenged. I believe that they will run afoul of the tax provision that disallows any and all deductions arising from transactions not entered into with
expectation of profit. Folks who have tried to use Amway to convert personal expenses into tax deductions have often incurred difficulty with this provision of the tax
The Tax People are taking advantage of the vulnerability of the IRS. The number of tax audits conducted has dropped sharply as the IRS’s budget has been slashed
over the last few years.
When I began tax consulting in 1970, the IRS goal was to audit 5% of all tax returns. That number has dropped to less than 1% today. The old story is still true: You
can deduct anything you want as long as you aren’t audited.
The Tax People is a dubious organization that brings out the worst in taxpayers. However, its existence points out a problem in our tax system. Taxes are too high. If
Congress should drop the maximum tax rate to 15-20% people would be less inclined to participate in scams like this.
As long as people feel that their taxes are too high, they will be tempted to resort to scams to achieve a better tax comfort level.
What can be done?
In my view, our system of federal taxation works backwards. Under the current scenario, we authorize Congress to spend as much as it wants and adjust our tax rates
accordingly. Of course the adjustment is always upward and always will be as long as this biscuit is dangled in front of a starving dog. A fair amount of the blame falls
on us too. We have spoiled ourselves to look to government rather than ourselves to solve our problems.
A different approach to taxation would be to fix the tax rates at a lower level and tell government to do the best it can with what is has to work with. Isn’t that what we
do in our personal lives? I am convinced that we could get all the government we need for 15% of the gross national income. Arming Congress with any more than that
invites funding their re-election with our money through pork projects back home in the district. Currently, taxes consume about 21% of the gross national income.
The more we domesticate an animal, the less independent that creature becomes. The same is true with people. Our country has achieved greatness by the efforts of
independent people who relied primarily on themselves for solving problems. In exchange for lowering taxes, we would have to wean ourselves from the governmental
bottle and resolve to solve more of our own problems.
I believe that government has an important role to play in keeping civilization civilized. I believe that role can be accomplished with less money than is now flowing into
Thought for the Moment
See that no one takes you captive through hollow and deceptive philosophy, which depends on human tradition and the basic principles of this world rather than on
– Colossians 2:8
Joe D. Jones, CPA is publisher of the Mississippi Business Journal. His e-mail address is firstname.lastname@example.org.