And it was very interesting. I was intrigued by this comment: "Its that we don't do enough to prevent the fairly obviously illegal schemes various rich people use to justify their non-payment of taxes."
I worked with a guy once who reported that his rich parents were helping him avoid income tax almost entirely. (I had the opportunity to weigh in on whether our firm would help him arrange his pay to fit with this scheme, and I proudly and firmly vetoed it -- I think tax cheats are scum.) But I wondered how his family managed it. Are these schemes just not pursued by the IRS? Why not, if they've such a reputation as capricious, jack-booted thugs? Is the reputation wrong?
The problem, Unf, is that what you are saying is just not correct. One example is that while commoners like you and I get non-qualified stock options that, indeed, get their payoff taxed as income, our superiors get incentive stock options which follow different rules. Now, once again there is an issue of risk --- you have to wait some amount of time before exercising the options (and if you screw this up you will pay, as in all those sad stories two years ago about people who couldn't pay their taxes because of AMT of under-water options) but the potential is there. (I have probably got some details of the above wrong since all I've ever cared to learn about in detail is the tax laws that apply to my options and situation, but that's the basic idea.)
A second scam consists of creating a personal S-corp and charging vast amounts of your everyday expenses to it. For example, you use your car to get to work every day, don't you? So you can charge part of it to the S-corp.
A third scam involves foundations. Create a foundation to acheive some marvellous goal and pour lotsa money into it. Now make your kids etc trustees of the foundation (and pay them for their efforts). It gets better in that, as I understand it, you can also set up the fund to do nice things like lend the kids money at zero rates of interest (of course for perfectly legit purposes like buying a house). If you do this early enough in the kids lives, the savings really add up.
Trusts, of course, are also part of the great "lets avoid any inheritance tax" game, not that that exists any more. I remember reading, though I don't know enough about the law details to follow the specifics, that you can create trusts outside the US that if done right become what all these tax evaders desire more than anything else --- something that throws off money (to the kids, not to you) that simply is not taxable by US authorities.
There are also games you can play with property (based on the fact that not one, but two houses can avoid paying cap gains tax when sold) which, let's face it, are only open to the wealthy, and have no economic or social justice justification.
WOW thanks for bringing that one to our attention. That qualifies for "post of the year" award. The IRS has stepped up its efforts to shut down shelters in the recent past (2-4 yrs) and from media reports it seems pretty successful. What our author is trying to get at, and something I'm familiar with from past experience, is that higher level tax attys and accountants are putting their magnificient brains to work for rich clients and corporations pushing the envelope. This is not endemic to tax law or tax code. The other side is that the tax authorities don't really care about small potato tax payers as much as the bigger people. A complicated issue, but that guy is waaaay off the mark. WOW
You're a good man, Unf! A credit to your profession.
Or at least a credit to your avocation....
-Magik
Posted by Magik | Link to this comment | 09- 4-03 11:06 PM
And it was very interesting. I was intrigued by this comment: "Its that we don't do enough to prevent the fairly obviously illegal schemes various rich people use to justify their non-payment of taxes."
I worked with a guy once who reported that his rich parents were helping him avoid income tax almost entirely. (I had the opportunity to weigh in on whether our firm would help him arrange his pay to fit with this scheme, and I proudly and firmly vetoed it -- I think tax cheats are scum.) But I wondered how his family managed it. Are these schemes just not pursued by the IRS? Why not, if they've such a reputation as capricious, jack-booted thugs? Is the reputation wrong?
-Magik
Posted by Magik | Link to this comment | 09- 4-03 11:11 PM
The problem, Unf, is that what you are saying is just not correct. One example is that while commoners like you and I get non-qualified stock options that, indeed, get their payoff taxed as income, our superiors get incentive stock options which follow different rules. Now, once again there is an issue of risk --- you have to wait some amount of time before exercising the options (and if you screw this up you will pay, as in all those sad stories two years ago about people who couldn't pay their taxes because of AMT of under-water options) but the potential is there. (I have probably got some details of the above wrong since all I've ever cared to learn about in detail is the tax laws that apply to my options and situation, but that's the basic idea.)
A second scam consists of creating a personal S-corp and charging vast amounts of your everyday expenses to it. For example, you use your car to get to work every day, don't you? So you can charge part of it to the S-corp.
A third scam involves foundations. Create a foundation to acheive some marvellous goal and pour lotsa money into it. Now make your kids etc trustees of the foundation (and pay them for their efforts). It gets better in that, as I understand it, you can also set up the fund to do nice things like lend the kids money at zero rates of interest (of course for perfectly legit purposes like buying a house). If you do this early enough in the kids lives, the savings really add up.
Trusts, of course, are also part of the great "lets avoid any inheritance tax" game, not that that exists any more. I remember reading, though I don't know enough about the law details to follow the specifics, that you can create trusts outside the US that if done right become what all these tax evaders desire more than anything else --- something that throws off money (to the kids, not to you) that simply is not taxable by US authorities.
There are also games you can play with property (based on the fact that not one, but two houses can avoid paying cap gains tax when sold) which, let's face it, are only open to the wealthy, and have no economic or social justice justification.
Posted by Maynard Handley | Link to this comment | 09- 5-03 12:04 AM
WOW thanks for bringing that one to our attention. That qualifies for "post of the year" award. The IRS has stepped up its efforts to shut down shelters in the recent past (2-4 yrs) and from media reports it seems pretty successful. What our author is trying to get at, and something I'm familiar with from past experience, is that higher level tax attys and accountants are putting their magnificient brains to work for rich clients and corporations pushing the envelope. This is not endemic to tax law or tax code. The other side is that the tax authorities don't really care about small potato tax payers as much as the bigger people. A complicated issue, but that guy is waaaay off the mark. WOW
Posted by Balasubramania's Mania | Link to this comment | 09- 5-03 2:14 AM