Sunday, March 11, 2007

The $350 Billion Tax Gap - How Do Ordinary Americans Contribute to This Shortfall?

Not exactly earth shattering news here, but the IRS estimates that the amount that the government is shortchanged every year is somewhere around $350 billion (roughly 12% of total receipts).

Surely, we're not out there purposely trying to deceive the government of their rightful share of our AGI (adjusted gross income for normal people), are we?

A recent issue of "The CPA Journal" (yes, yes, I know - clearly I have no life when I've succumbed to the mind-numbing pleasure of reading page after illuminating page of the CPA Journal) indicated that the bulk of this gap comes from two sources - Underreported small business and self-employment income ($155 billion) and underreported nonbusiness income ($57 billion).

I am of the opinion that most people do not knowingly "cheat" on their tax return, but that they might not realize all of the income streams in their life that may be taxable.

Here is my favorite example:

Mrs. X's new Kia Sophia is rear-ended by Mr. Y's new Infinity G35. The damage is minor but still reported by both parties to their insurance companies. Mr. Y was clearly at fault and after two estimates put the repair cost at $450, Mrs. X receives a check to repair her bumper. Upon further inspection of her bumper and after seeing a sick sale on Jimmy Choo's, Mrs. X decides that she can live with the scrape on her bumper and buys 2 new pairs of pumps w/the cash.

Does Mrs. X owe tax on the $450? Of course, she does - it wouldn't be a great example if she didn't incur a taxable event. Very few people would recognize this as a taxable event, but if you failed to repair your car, this check becomes taxable income (you can postpone the repairs for up to 2 yrs, but if the repairs are not done w/in 2 yrs the check would be income at that time).

Thanks to everyone for the feedback on the gas article. I'm fairly convinced that traders are behind the recent price run. Traders will be distracted this week by the complex task of filling out their NCAA brackets so look for some easing in gas spot prices :)

Questions/comments -

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