Everyone cheats on their taxes, right? But, the question is or should be, when is cheating not really cheating? The list of politicians and leaders who have recently been tagged as tax cheats keeps growing: Among President Obama’s nominees or appointees Tim Geithner, Tom Daschle and Nancy Killefer immediately come to mind, all of whom attributed their tax problems to mistakes or oversight as opposed to deliberate avoidance.
One political type who also neglected to report income is Rep. Charlie Rangel, D-N.Y. Although he happens to be chairman of the House Ways and Means Committee, which writes our tax laws, Rangel conveniently forgot to report some $75,000 in rental income from a luxury condo he owns in the Caribbean.
Another example is White House chief of staff Rahm Emanuel, who it seems lived rent-free at the home of a friend in Washington, D.C., for five years. Emanuel, of course, didn’t think free rent was income that needed to be reported.
The New York Post reported: “The IRS and the U.S. Attorney’s Office in Brooklyn have an ongoing probe into (Al) Sharpton’s finances going back to his 2004 run for president and stewardship of NAN (National Action Network) … As of 2006, the most recent year that financial documents for the group are publicly available, it owed $1.9 million in payroll taxes and penalties … Personally, Sharpton owes $931,397 in federal taxes and $365,558 in New York City taxes, according to an IRS lien.”
Whether deliberately or mistakenly failing to report income, who really understands our tax laws? Certainly not the average taxpayer. For that matter, most tax professionals don’t understand it either. Not completely. How could they? The tax code consumes almost 17,000 pages, and when IRS regulations, legal rulings and interpretations are added to the mix, the total adds up to around 66,000 pages of legal gobbledygook.
No one could possibly be expected to know and understand such an incredible volume of information, much of which is ambiguous and contradictory.
The complexity has been graphically demonstrated by surveys of private-sector tax preparers conducted by Money Magazine from 1987 to 1991. Fifty tax professionals gave 50 different answers for the tax liability of the same hypothetical family financial profile. And, none of the 50 answers were correct. The results of their 1992 survey were even more troubling because the range of tax liability calculated by the 50 tax preparers varied so greatly. On the high side, the tax for the sample family was determined to be $46,564. On the low end, it was $16,219. It is both interesting and alarming to note there was no right answer. Because of the ambiguity of the tax code, the best that could be done was to calculate a “target tax,” which was $26,619. And, the situation has grown worse in subsequent years.
One of the most compelling illustrations of the complexity of our tax laws was noted in a 2006 Associated Press report that when General Electric’s tax return was filed electronically, it took 24,000 pages to document. The article further observed that “if GE had sent paper forms, the return would have staked up eight feet high …”
Additional evidence of the effects of our complex tax laws is found in the number of taxpayers who feel they must use an accountant or a tax service to prepare their returns. And, IRS national opinion surveys conducted in 1987 and 1990 confirmed “that the most frequently given reasons for using a preparer were the complicated nature of return preparation, or fear of making mistakes.”
» In 1981, 41 percent of taxpayers used a tax professional.
» In 1986, it was 46 percent, or more than 45 million filers.
» By 1992, 50 percent, or 57.5 million citizens, sought professional help. That’s an 18 percent increase during a period when the tax laws were supposedly simplified.
» In 2006, 61 percent of taxpayers paid someone else to prepare their 2005 returns for them.
Further insight into the complexity of the tax laws is found in the fact that by 1993, about 60 percent of the House Ways and Means and Senate Finance committees did not prepare their own tax returns. This is even more troubling when you realize these are the two committees that write our tax laws.
So, when is a “mistake” just a mistake and when is it a deliberate act to avoid paying taxes?
— Harris R. Sherline is a retired CPA and former chairman and CEO of Santa Ynez Valley Hospital who has lived in Santa Barbara County for more than 30 years. He stays active writing opinion columns and his own blog, Opinionfest.com.