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Friday, April 29, 2011

Mishpacha: Keeping a White Collar Clean

I am very thankful to those who are the eyes and ears of this blog and a special thank you to reader rosie. Mishpacha has run an article in the recent edition titled Keeping a White Collar Clean. I need to get my hands on a copy of the magazine and plan to buy a copy later this week so I can write some though. Rosie summed up some of the reasons below (underlined) and I am very grateful for the summary as the information is enhancing from a professional standpoint. Below the summarized reasons, I've put some of my own notes and hopefully this post will serve as a reminder to me to get on the ball and take some time to write about some tax and personal finances topics that I've wanted to write about but need to clarify my thoughts in order to share valuable information.

1. Foreign bank accounts and not paying taxes on them.

Foreign bank accounts are a hot tax topic lately. In the past, such accounts were often ignored and in 2004 the government enacted a penalty for those who did not report foreign accounts--owned or signature authority--totaling $10,000 or more during the calendar year. More requirements on the FBAR are available at the IRS website. I'm not an expert on FBAR reporting requirements, nor do I have any foreign accounts of my own or intentions of opening foreign accounts.

The bottom line is that all income, no matter where it is sourced, must be claimed on the 1040 (in converted American dollars). Failure to claim the income can open the door to taking credits that the taxpayer is not eligible for. Foreign income can be excluded under certain circumstances (form 2555 or 2555EZ) or a tax credit can be claimed for foreign tax paid.

2. Business that often commit fraud such as the mortgage business.

3. Due to parental support, people with homes and cars get IRS attention because they claim no income.

It is important to understand that audits are mostly triggered based on ratios. When the "numbers don't add up" it arouses suspicion. People can't be spending all their money on mortgages, business expenses, medical expenses, etc. They still need to eat and wear clothing.

Excessive itemized deductions in comparison to income is a red flag, especially for years on end. I found a reference to the ratios through a firm: for itemized deductions 45% is the ratio and for Schedule C (business income or loss), expenses exceeding 60% of income is the trigger. Mortgage interest, taxes (real estate and state income taxes), and charitable donations are the big three itemized deductions. I checked our ratios and was please to be well under the audit trigger for both schedules.

I once had a Shabbat lunch with someone whose ratios had triggered an audit and the IRS examiner asked him "what do you live on?" I don't think "G-d provides" is the answer the auditor wants to hear. So if your ratios are excessive, it makes sense to have an answer. When my parent's tax return was flagged for audit, they were able to sufficiently explain to the examiner the market trend and never had to undergo the arduous process of a full blown audit as the explanation was reasonable and easily verifiable.

4. Larger than average charitable contribution deductions getting IRS attention.

I believe the IRS tracks average charitable deductions by taxpayer income. I recall reading somewhere that the average American donations between 3 and 5% of AGI (adjusted gross income). Exceeding the average is fine, but donations need to be well documented. In recent years documentation requirements have tightened. All cash donations need a receipt. A letter stating no goods or services received is required should a donation be $250 or greater. Cancelled checks or credit card receipts will suffice for donations under $250.

5. Money borrowed from gemachs that allows people to live with more than they make but attracting the attention of the IRS.

This clearly plays into the discussion of ratios above. I'd like to learn more about all of these money gemachs I keep hearing about. Out of town, we tend towards lending gemachs: simcha wear, children's clothing, baby equipment, and the like. An issue I can see arising should an auditor be presented with a bank register and out of wack numbers would be if the loans are really income, rather than loans and/or tzedakah (see the domino effect, #8 below).

6. Large checks over $10,000 hitting the banks or smaller checks that follow a pattern, alerting the government.

7. Jews incriminating other Jews during plea bargains or because they are involved in business or divorce disputes.

8. The domino effect when one fraudulent businessman is investigated and those who did business with him are investigated as well.


23 comments:

Anonymous said...

Doesn't this sound like advice about how to avoid an audit, rather than advice about how to be truly clean?

Orthonomics said...

Which advice?

The audit ratios are interesting because they represent a norm.

If you want to avoid a ratio, claim every penny of taxable income (rounded to the nearest dollar) and claim real expenses, not estimates.

thegameiam said...

There are some frightening pieces of conventional wisdom in the Orthodox world - as an example, if some school tuition is called a "donation to a synagogue" there are a lot of folks who think that is tax-deductible. This is, of course, false- only *voluntary* contributions where *no goods or services are received* are deductible.

rosie said...

I neglected to mention that non-profit fraud is also something that the government is watching for and the Orthodox community has numerous non-profit organizations. The gist of the article was that anything that will call attention to someone's financial situation could be the catalyst for discovering illegal activity if it has occurred. The last line of the article was a warning that anyone who dons a kippa should live up to what they are wearing by not doing anything illegal.

Anonymous said...

My income is fairly low so I don't really pay income taxes and qualify for an earned income tax credit. I think that the IRS targets the big fish so I feel pretty safe from an audit although I make around $6000 off the books doing handyman work.

JS said...

If you're taking suggestions for a blog post, I'd be interested in hearing more about what types of donations in the community are deductible and which are not. There are a lot of false rumors and bad advice going around. For example, are membership dues deductible? What about a shul/yeshiva dinner? What about donating or contributing towards a kiddush? A donation for getting an aliyah or other honor? Making a bris or other simcha where the shul charges certain fees as a type of forced donation?

There are countless more examples.

Orthonomics said...

Anonymous-You don't even have a clue how off base you are. . . and not just morally!

The IRS is cracking down on those who take the EIC and don't qualify. There are plenty of articles on that. Those who prepare taxes also need to take additional care and ask relevant questions when things just don't seem reasonable. There is plenty of information online.

I hope you don't ask anyone to prepare your return. If you want to be dishonest, so be it. But don't ensnare an accountant who hasn't the knowledge to detect the fraud.

Orthonomics said...

JS, good questions. Worthy of a post if I get to it.

Anonymous said...

I do as little on the books work as possible to qualify for government benefits. This allows my family to avoid taking support from the community. I will admit that my kids get a scholarship but it's no more money than most of my friends' kids get. Even if I told the IRS everything, it wouldn't amount to much, so I really doubt that they'd go after someone like me.

Anonymous said...

Anon 6:43 - what do you mean you don't get support from the community. If you are working off the books and if you are getting government benefits you are getting support from the community in two ways - others are, in effect picking up your tax obligations since everyone else's taxes are affected by those who work off the books and don't pay their fair share, and you are getting government benefits that weren't meant for you. Are you a troll or just a thief?

conservative scifi said...

Anonymous,

It is the lack of Yashrut, not the amount of money, that matters. What your actions say is that you don't actually believe in Torah values, since you are willing to cheat the government and your neighbors. You simply like fitting in to that community. It always amazes me that someone who is probably strictly shomer shabbat, kashrut, and maybe even tries to minimize Lashon Hara can choose the less ethical path with regard to taxes and money.

I must admit to being less strict on some of the ritual commandments, but I pay every penny in taxes and I pay my tuition and other commitments in full. So while I am not perfect either, if I am choosing commandments to keep, they are the ones between adam lechavero, not adam lemakom (since I think God will understand better).

Orthonomics said...

Anyone who is happy to be dependent clearly says a different birkat hamazon than I do.

Orthonomics said...

Assuming you are not a troll, you bring the rest of us shame. Your theft and disregard for the money of others brings us all shame and disrepute.

Anonymous said...

There is nothing wrong with getting the benefits that we are entittled to just like everyone else. I have been on unemployment for over 6 months and receive food and housing assistance along with medicaid and a free cell phone. I don't see it as being a big deal if I pick up a few cash jobs at the local fruit market. Sadly, my family is actually well ahead of where we were financially when I was working. I think that this says more about our government than my personal situation, though.
Sam G.

Dave said...

If you are committing fraud by hiding income, then those aren't benefits that you "are entitled to just like everyone else".

Anonymous said...

I have read this blog for a while and I think that it is aimed at a fairly successful, professional demographic. Many working people who are paid in cash do not report their income to the IRS, and I honestly do not think the IRS cares. They target high income people who would have to pay a much higher percentage of their money if they were audited than the guy making $6000. Also my personal view is that taxes are mostly set up in this country to redistribute wealth rather than to support the govenment.

Miami Al said...

Anon 3:05,

Nobody will care if you sneak out for a Pepperoni Pizza either, certainly won't enforce it.

Should I believe you when you you tell me that you lie to the IRS but not your neighbors when it comes to dining out?

Perhaps you think that strict Kashrut is only for the rich as well?

Anonymous said...

Actually, I know several people who did stop buying kosher meet because of the high cost.

Anonymous said...

I would looooove if the IRS went and pulled every tax return taking the EITC from "Sam G." and audited them. Would love it.

Anonymous said...

I think that the Government gives us benefits to make us loyal to the party that we see as our benefactors. I used to be a Republican but I would be crazy to want to vote them out and take the chance of losing what I have. I have actually gained financially from my situation, and I really don't feel much pressure to go out and try to find a new job.
Sam G.

mlevin said...

The last post fron Sam G. just proved that he is a troll, but there are many people both frum and not (including not Jews) who are cheating the system by reporting no or low income and qualifying for all the government programs including foodstamps and medicaide.

I am still trying to understand why doesn't the govern't just go, watch and take pictures of these poor and then confiscated all of their ill gotten possessions. All it would take is to make example of a few and then the rest will suddenly find ways to have an income without government interferance.

Zach Kessin said...

Anonymous its a good thing you are anonymous because you just admitted to tax fraud and welfare fraud! It kind of scares me that you don't see them as a big deal.

I don't know what the odds are of someone catching you doing that but I would not want to find out.

Anonymous said...

As a boy, I looked up to Orthodox Jews. I hate to admit it but now when I read a news story about an Orthodox Jew who is said to have broken the law, I just assume that he is guilty. In my business, I also take extra steps to ensure I get paid because of the many bad experiences that I've had with failure to pay for services rendered. I'm not sure if Im' just older and wiser now or if therehas been a change in the Orthodox community over the past 40 years.