The Independent Market Observer

3/14/13 – Today Will Not Be a Good Day

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Mar 14, 2013 10:35:03 AM

and tagged Yesterday's News

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I’m meeting with my accountant this evening to go over my finances and prepare my tax return. Although I like my accountant and enjoy catching up, I’m not looking forward to it because I always end up owing money. I set aside as little as I can throughout the year, so the question at tax time isn’t whether I owe, but how much. I know I could easily avoid this by having more withheld, but I dislike giving the government an interest-free loan more than I dislike writing the check.

What I try to remember is that my life is much, much easier on the tax front than it used to be. Once upon a time, I owned and managed a couple of different companies. Accounting and tax issues took up more of my time than I could initially believe. Now that I’m a W-2 employee, albeit one with various investments that create their own complications, life is easy. Sort of.

Tax-wise, things are getting significantly more difficult for everyone than they’ve been in years past. The government doesn’t have to raise rates to get more revenue. All it has to do is more vigorously enforce existing regulations, or interpret existing rules in ways that generate more revenue, and this is what’s been happening for the past several years.

Here’s an example, taken from my tax notes from last year: Suppose you and your brother own an apartment property together. Like many people, you split the income and file on your individual returns. But have you filed a limited partnership or S corporation return? You better have. There never used to be a penalty for not filing one, but there is now: $200 per partner per month for 12 months. And there’s no statute of limitations. Not that it will always be assessed, but . . .

Besides reviewing my notes for my meeting tonight, an article in today’s Wall Street Journal—“Payroll Audits Put Small Employers on Edge”—got me thinking on the topic of taxes. The subhead really says it all: “Tax Crackdown Intensifies as More Businesses Use Contract Workers to Cut Costs; Firms Protest That Rules Are Unclear.” This is a good example of how the IRS is using existing law, which is often open to interpretation, to raise more revenue. The agency has set a goal of investigating 6,000 employers, and the crackdown is aimed in part at boosting tax revenue, the article says.

Although we do need to raise more revenue, the problem with this is that, ultimately, jobs will be destroyed. Using independent contractors when a full-time position isn’t warranted has become costlier and riskier, and therefore businesses will do less of it. Not only that, the time and cost to interpret and comply with this and other regulations will divert money and management attention that could be better spent on growing the business. Growth will suffer.

It would be better to have a clear, transparent tax system, even if the rates were somewhat higher. The costs of the current system extend far beyond the taxes themselves, including the expense of complying with the system and the even larger opportunity costs generated by it.

We need a simpler, more straightforward system, not just for the sake of the taxpayers but for everyone who would benefit from increased growth. As we approach April 15, let’s lean on Congress to get going on it.

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