The Trials of Tax Time: "I Owe What? Are You Sure? It's Right? It Is? Yikes!"

"April is the cruelest month," the poet T.S. Eliot wrote and this week millions of American taxpayers are confirming the everlasting truth of his words.  Under the glare of a menacing Uncle Sam, some 82 million taxpayers are racing to file their income taxes by midnight Monday.

Don't file or don't pay what you owe and Uncle Sam can get real mean.  Douglas E. Bruce of Denver, Colorado just got arrested for failing to pay his taxes.  Mr. Bruce, 61 and an anti-tax activist, faces up to six years in prison and $500,000 in fines.

In Webster, Mass, I.R.S. agents showed up at the home of William and Jennifer Freudenthal, which was in foreclosure, and seized their car for nonpayment of taxes.  Shortly afterward, a 911 call from their daughter brought police to the home where they found Mrs. Freudenthal dead with "traumatic injuries to her face and neck."  Mr. Freudenthal has been charged with her murder.

Even if you file on time and pay up, there is that nagging fear that you'll have to go through the trauma all over again -- with an I.R.S. audit.  A survey by AccountingToday.com found that 60% of taxpayers worry about being audited.  The fear greatly outranks other nerve-wracking things like a performance review at work (39 percent) and going to the doctor for an annual checkup (35 percent).

Death and taxes are often mentioned in the same breath  for good reason: we hate them both and no way on God's good earth can we avoid either one of them. That does not stop us from trying, of course. My federal and state have been filed, but only after days of collecting documents and receipts to minimize my taxes.

For me personally, the work and stress of this tax season has been monumental. Why? Because Uncle Sam wants more of my money than I think he should get.  I'd like to strangle the greedy old coot. Instead, I'm making my case  peacefully, legally, using  his own U.S. tax codes.

Don't I have the same rights as GE whose creative use of the U.S. tax codes left the giant firm with a tax bill of zero on profits of $14.2 billion? Not a single cent.  Its vaunted 1,000-person tax department made it happen.  The department is viewed within the company as a '"profit center."

Read about GE's fabulous tax-dodging in the now famous New York Times front-page story on March 24. It shows what can be done when you put the U.S. tax code to work for you.  The fact that its 5,600 pages are incomprehensible to normal human beings is a plus.  It means that there is something there for every taxpayer who wants to minimize taxes.

My tax saga began with a phone call.

"Your taxes are done," said the telephone message of my tax man, Dave.  Then, in a soft but ominous voice, he said, "There's a little difference with the I.R.S."

"Now that does not sound good," I said to myself.

I had no idea what it could be.  I had what I thought were unusually high deductions and had spent days pulling together receipts and corroborating documents.  I itemized health expenses, including Barbara's costly dental surgery and crowns. I had losses from a restaurant venture, which I had invested in.

Also, ours is a modest income from Barbara's teacher's pension, my social security, and my 401K. Thanks to Barbara's near-maniacal record-keeping, everything was fully documented.  On top of that, there was no fudging of anything. I'm honest. Always have been.  Always will be.

So when I showed up at Dave's office to pick up our return, I wasn't really worried.  However, when he told me what we owed  in federal taxes, I nearly keeled over.  In my entire life, I had never had to pay anything near that in additional federal taxes; most years, I get money back.  

"I don't understand," I said.  "I thought we would be getting money back. What's the problem?"

"That distribution from your 401K made more of your social security subject to income  tax."

"I didn't know about that."

"Most people don't," Dave said.

I had taken out a lump-sum distribution from my 401K to buy Barbara a car, not realizing that Uncle Sam was going to punish me for it. It wasn't an expensive new car, either.  It was a 10-year-old used car.  I would have been better off  financing the car and paying the high interest.

Dave understands the U.S. tax code and, doing about a thousand tax returns a year, follows it to the letter in every one. He is neither for the tax code nor against it.  To get an opinion on it from him, you'd have  to resort to torture.   He's  honest,  keeps his fees modest, and I'm completely comfortable having him do my taxes.

In addition, he's a friendly guy with a quick smile. Remarkably, he is adept at dealing regularly with clients who are careless, who procrastinate, who are disorganized, who can't pull all those documents and figures together.

Some want to deduct everything under the sun. I couldn't understand why money I had contributed to the restaurant venture was not reflected in my return. "That was a loan from you to the corporation," Dave said matter-of-factly,  "It's not deductible." That ended that.

Many, feeling screwed by the I.R.S., lay rants on him.

"Here I am, an old man living on social security, a pension, and a 401K," I said, "and the I.R.S. is grabbing additional taxes from my social security?"

Dave spread both hands up and out and made with a helpless shrug.

"It's not you, Dave," I said softly. "It's the tax code.  I know that."

On my way out, Dave's office assistant whispered to me, "You're right," she said. "The I.R.S. shouldn't be going after additional taxes from social security, but he can't say it."

"I know.  Thank you."

At home,  I reviewed the tax returns. Greek to me, not to mention boring, even though it's about our money.  Then I took the returns to my sister Ruby, pictured here, who owns rental properties and deals  regularly with tax accounting.

To her,  money and taxes are anything but boring. She understands taxes and is a great money manager. She knows a good tax preparer, too. It was she who had recommended Dave to me.

We both sat at her kitchen table as she reviewed my tax returns. She studied the forms closely.  Finally, she looked up and said, "Everything looks in order."

I asked her what I could do to get my tax bill down.   She mulled it over.  Then she said, "Your E-books. You work on them at home and they are for sale online.  You have a home business. That means you have costs that are deductible."

She explained that rooms and parts of a home used for business qualify for home office deductions, allowing a homeowner to depreciate a percentage of a home's cost. In the photo above, she jots down various home office deductions.  She said I can claim a portion of home improvements, utilities, insurance, and maintenance costs.

 She asked how much time I spend working on e-books at home.

"With my blog and e-books, just about every day in my office downstairs and often all day and into the night," I said.  "Plus Barbara works in the upstairs office where we keep all the files.  She's my ace proofreader, record-keeper, and office manager."

Ruby emphasized that the taxpayer and not the tax preparer is solely responsible for the tax return.  That's because everything depends on the information given the preparer, she said.

That was okay by me.
 
I sat down and wrote the following e-mail to Dave:

Hi Dave,


Although my tax return says I am retired, I'm actually not. I work at home just about every day-- as an E-book publisher.  I have been working on the business all last year, leading to  two e-books for sale on Amazon.com and the Google E-bookstore. I am what is called a publisher partner to both. To see one book, click here.  To see the other, click here. Because the e-books only recently went live and I haven't done any promotion yet, they haven't generated income (just that $11.00 from Amazon.com) In addition, I am starting to publish e-books by other writers and two of these are underway. I also have a web site with advertising. It is : patientsprogress.blogspot.com

In other words, I am operating a small business out of my home and it has expenses (couple of computers, internet, subscriptions to publications, etc.  I didn't  claim these because I didn't think I had to. I thought I had plenty of deductions and I was also tired of  pulling together supporting documentation.  

But now that I see the large amount that I owe, I have renewed energy for providing the documentation. For example, I already  have supporting documents for two computers (receipts with check numbers and dates) and will provide all needed documentation.

My questions to you are these?  Should  a Schedule C be filed? Would doing so reduce what I owe enough to justify it?

I'll  stop by within the next few days, but I wanted to give you a heads up. Lest you think it a figment of my imagination, I wanted you to  see the books as they are actually being offered for sale worldwide.

And while you're there, and since you know I need sales, I think you should order a copy of each book.


Sincerely, 

George


I received the following reply from Dave:




It sounds as though we should prepare a schedule C for you. This will allow you to expense the business use portion of your house and the equipment that you purchased and use in your business. To do this, I will need the following: Total house heated square feet, size of your office space, the cost of your home and capital improvements so it can be depreciated. Also the yearly costs for:
Electric
heat
Home owner Insurance
Water & Sewer

This will make a more accurate return and you will be able to take the schedule C loss.

Thanks,

Dave

Then it was back to collecting documentation and more hours of tedious work.  After we had pulled it all together, I took it to Dave.  He redid our taxes. A few days later, we got a phone message from him saying our taxes were redone and ready for pick-up -- and with no ominous overtones.


At his office, he met me with our tax returns in hand and his usual smile.  "I hope it was worth it,"  I said. Always carefully nonpartisan, he simply told me what we now owed.  Our tax bill had been cut in half.


My new E-book, "Winter of His Content," a collection of the six Nanook stories, will be on sale next week on Amazon.com and the Google E-Bookstore.  Be sure to buy it and tell others to do the same because there's nothing like sales to disappoint those nonsmiling I.R.S. investigators when  they show up at our home. 

While standing squarely behind everything in our tax return, I'll be happy to show them around. We'll offer the investigators coffee, a healthful snack, small talk, and our sincere apologies for having wasted their time.

"It's not you," I'll tell them politely. "It's the tax code."


So long and keep moving.


P.S. An ABC News video and story shows how tough the I.R.S. can be. The agency is said to be a "bully" and to "take action first and ask questions later."  Click: http://abcnews.go.com/Business/2011-tax-time-irs-liens-filed-rights/story?id=13356287



My novel, State Kid: Hero of Literacy is a Google E- book. 

Billy Stone was a foster child.

He ran away from abuse.

He went to juvenile prison.

He went up from there.

And he did it his way.

With the power of the written word.