Taxes: Taxing and Trivial Pursuits

This is the time of year when we—once the freest people on Earth—are compelled to commit "voluntary" self-assessment of our income taxes.

This is also the time of year when everyone is advising you what to do about it. Some of these advisors are eminently qualified; others are fools, hucksters, or charlatans; and a few—with views especially appealing to readers of this magazine—have a sincere but profoundly mistaken faith in some really impossible schemes.

So where do I fit in? I'm not selling you a book, or a taped tax rebellion course, or a do-it-yourself tax-free guru kit. I don't have a gimmick. I'm just telling you what I know after years of study and law practice.

My advice this month, for all of you who are still burning the late-night oil to get your 1040 done, is about what not to do, or at least what you should consider not doing. But be warned, if you follow my advice you may end up paying a bit more taxes than you would otherwise. That's because my goal is to keep people out of trouble, not get them in.

Some of you will reject my advice because it reeks of compromise; but I don't see it that way. I think you can keep your principles and keep your freedom too. But it might cost you some extra taxes.

Okay, what shouldn't you do?

Obviously, you shouldn't commit fraud; and (this may surprise some of you) you shouldn't file one of those goofy Fifth Amendment tax-protestor returns (more about that in a later column). But there are numerous little things that you probably do every year without much thought, and I want you to stop right now and think about them.

Suppose I made you this offer (Warren's Wonderful Warranty): "In exchange for a one-time fee, I'll permanently relieve you of all this year's tax records for certain deductible items; no one, not even the IRS, will ever see what's in those records; if you're ever audited, I'll handle those items at no additional charge; and I guarantee that you'll never pay any more taxes, interest, or professional fees on those items." Would you make that deal? Of course you would! It's worth almost any price.

That deal is available right now from your Uncle Sam. All you need to do is reduce or even eliminate your itemized deductions—particularly the ones that are susceptible to attack during an audit (like the value of old furniture you give to charity), and those items which don't amount to much anyway.

I am not suggesting that you never take an itemized deduction. Some are definitely worth taking and involve very little record-keeping or audit risk, such as taxes on your home (not yet repealed) and interest on your mortgage. But other items are not necessarily so benign. You need to take a long look at each item, each year, and ask yourself these questions:

• How much is this item really worth; i.e., what does it actually save you in taxes? Do the tax computation with and without the deduction. You may be surprised how little it means.

• Is the tax saving enough to justify keeping records through the year and storing such records for many years thereafter?

• Do you really want the government to have this information (about your illnesses, your charities, your calamities)? In case of litigation, do you want it to be public information?

• What is the cost in your time and in professional fees of going through an audit on this item, even assuming it's resolved entirely in your favor?

• Will this one item trigger a major audit of everything else for the year? Or for a few years in a row? Is the tax saving on this item worth the risk?

See what I mean? If your gain from a deduction isn't all that big, think what you're going through for a few lousy bucks.

Some of you will recoil from my advice and say: "Damn it, I'm entitled to those deductions, and I'm going to take them!" Fine with me; but on reflection, you may decide that your time is better spent in making money rather than collecting and organizing scraps of paper for future audits. A tax dollar saved is an excellent thing, but not if you could have earned five dollars with the same effort. That's not compromise; it's good business.

If you think my advice up to this point has been perverse, you ain't seen nothin' yet. Now I'm going to suggest that you forget about income averaging. Consider this:

The statute of limitations on a tax return expires three years from the date of filing, which means that three April 15ths from now (or whenever you file) your 1985 return will no longer be subject to audit (although in special cases the statute of limitations is six years, and when there's fraud, it's forever).

But if you use income averaging for 1985, all the "base period years" you're dragging into the calculation (1982, 1983, and 1984) will remain vulnerable to IRS attack as long as your 1985 return is open—at least until 1989. Do you really want to give the feds three extra years to look into 1982? What's it worth to get those older years closed? Think about it.

Whether you pay taxes from a love of liberty or a fear of imprisonment, it amounts to the same thing—you're buying freedom. So spend your money wisely and don't settle for cheap imitations. Quality always costs more.

Warren Salomon is an attorney and tax specialist practicing in Miami.