A Taxing Essay

It's April, which means it's time once again for our annual tax advice column. Annual in the sense that every year at this time, we think to ourselves "We really should write a tax column", and so this column is "annual" in the same sense that earning a million dollars is an annual event for us.

Before we begin, we want to let you all know our qualifications. We are not registered CPAs. Our math skills are passable if you grade on a curve. But our former mother in law is a certified accountant, and we used to sing in an a cappella group led by a man whose day job was tax attorney for the IRS, and so we feel extremely confident that you should all trust our advice implicitly. Confident in a way that only the secure knowledge that anyone who does will be locked away for years and thus be unable to come after us for their just retribution can make us.

Let's begin with a little bit of history. The primary U.S. Tax form is the 1040, named after the year in which Lady Godiva made her famous ride through the streets of Brussels, Belgium throwing truffles at the little children and hitting "Peeping" Tom the tailor in the eye, which was the origin of the phrase "It's all fun and games until someone puts an eye out". This tells us that one of the best ways to ensure a favorable viewing of your tax forms by the IRS is to include with your forms a box of high class chocolates.

"But won't the chocolates melt and get all over my tax forms, rendering them illegible?"

Well, yes, there is that risk, but you should also consider the not widely known fact that the main IRS processing center is located in Dante's ninth circle of hell, the frozen circle, and so really, the only chance of your chocolates melting is if the postal service is not sufficiently speedy in getting your forms there in a timely fashion, and we can all agree that if there are two things the postal service is known for, it is "spindling" and "mutilating".

"But then what happens to me if the IRS can't read my forms?"

Well, first off, that's not your worst problem. Your worst problem will be the hungry denizen of the IRS who is now angry that you have whetted their hunger with the aroma of chocolate while not having provided any that remains in edible condition. But the truth is that the worst thing the IRS will do to you in this case is something called an "audit", which can't be that bad, right? I mean, it's a quiet little word, only five letters; surely if it were something really bad, it would have a more terrifying name, such as "Armageddon" or "Schwarzenegger".

The audit is the process by which the IRS very reasonably and politely crawls up your financial posterior armed with a pickax, a headlamp and a quart of 30 weight motor oil (don't ask why) and attempts to determine where you've hidden all of the riches they're certain you have and have been refusing to declare so as to get out of paying your fair share of taxes.

We can take another hint from Lady Godiva here, too: If you ever do get audited, show up naked. There is one of two very real benefits to showing up naked, depending on who you are. If you happen to be young and beautiful (and here we are thinking of Brad Pitt or Angelina Jolie), showing up naked may just put the auditor into such a congenial state (as measured on the Mohs scale) that they let you off with just a warning, or failing that, feel unwilling to get up from behind their desks to chase you if you simply walk out of the audit. If you do not happen to be young or beautiful (and here we are thinking of everyone else in the United States), at least the IRS will not have to tear a hole in your good pants to gain access to the entry point for their examination.

"OK, so I want to avoid the audit. I'm confused about 'tax deductions' and 'tax credits'. Can you tell me the difference?"

Sure. A tax deduction is the final amount of taxes you owe after having calculated your way through all of the forms if you have it checked over by Dr. Watson. You know you have done a good job on filling out the forms if, on looking at the final outcome, Dr. Watson says "Brilliant deduction, Holmes!".

A tax credit sounds like a good thing, but remember that in 2009 in the United States, we're in the middle of a huge credit crisis and nowhere is this more true than in the world of income taxes. Unless you are "too big to fail" (and here we are thinking of noted thespian Ron Jeremy), reporting a tax credit on your tax forms is a risky business and could end up with your net worth plummeting to cents on the dollar until you are divided into pieces and sold off to your neighbors at fire sale prices.

"Wow, that sounds bad! I see in my tax form packet a number of forms called 'schedules'. What are those all about?"

You can ignore those, unless you are a corporate filer who went through a corporate merger in the past 12 months and is filing jointly. Some corporations use a different financial calendar than the rest of us do, and so they have to file these "schedules" to let the IRS know when they plan to pay their taxes, the answer to which is invariably "never, because we have moved our headquarters to the Cayman Islands, thus allowing us to avoid any financial interactions with the federal government that do not come in the form of huge 'bail out' checks written directly to the bonus fund for our top executives."

"I never had any children, but I'm one of those pathetic people who is never invited anywhere because I insist on bringing my six dogs and three cats with me and demand that they are like my children, and should be invited anywhere I am invited. Can I claim them as dependents?"

Yes, but only because your friends will really appreciate the break from dealing with you until you get out, and as an additional bonus, by the time you get released, most of those pets will no longer be with us, and those who are will have evolved language skills and may well understand common manners well enough to explain to you that you are a doofus.

"Fair enough. I have a few medical expenses. Is there any way that I can list them on my tax form, and reduce my tax burden?"

Possibly, but probably not. There are two methods the IRS uses to determine whether your medical expenses were extreme enough in the previous year to qualify for tax relief, the equivalency test and the rule of thumb. The rule of thumb is probably the easiest to quantify. Put simply, it is "if the sum of the medical expenses incurred by the filer was more than a top notch hospital would charge to clone a copy of a human thumb and then successfully attach it after a tragic hitchhiking accident, then the expenses are deductible, but only to the extent that the new thumb is fully functional."

The equivalency test is much harder to accurately calculate, but essentially if you consider the IRS to be like a loan shark, then you consider the sum total of all of the medical expenses you would incur over a year of trying to duck out of paying "Federal Eddie the weasel" and compare that to your own medical expenses, being sure to subtract out of your own a value equivalent to the damage to Eddie's henchmen's knuckles. Then consider that this is not unlike what the IRS will do to you if you DO claim your medical expenses and they consider those claims to be invalid. Now decide whether the amount of money in question is sufficient to be worth that risk.

"I have a personal net worth in excess of one hundred million dollars which I have stashed away in various tax shelters such that I have never had to pay any taxes. This year, through the various congressmen I have in my pocket, I have managed to push through tax changes allowing me to deduct the maintenance costs of my personal helicopter and Lear jet, but since I do not pay any taxes, can I get a refund for the money I paid to buy those congressmen?"

Oh, dear, look at the time. That's it for this year. Be sure to read next year's tax advice column when we will cover the topic of "amortization", the process of having your tax return looked over by your CPA "Mort" before submitting it to the IRS.

Copyright © April 11, 2009 by Liam Johnson. http://liam-humor.blogspot.com