Two things in life are certain: death and tax
By Basab Dasgupta
Filing income tax returns in the USA requires not only competency in basic mathematics but also an ability to understand the rationale behind each step in the tax computation. This complexity is ironic in view of the limited expertise of average Americans in Math.
It is not surprising that people spend tens of thousands of dollars on companies like H&R Block and purchase software such as Turbo-Tax to help them in tax preparation. It is unfortunate that the “flat tax” system, advocated by Steve Forbes and others many years ago did not materialize.
There has not been a revolt against the tax system because 45% of the population does not pay any income tax. The entire system is a political game in the upper echelon of society to grab power and increase wealth; everyone in that group gets help from a professional accountant.
Why do we even pay taxes?
Of course, in a democratic society, everyone must pay taxes to cover the expenses of infrastructure, security, education, social welfare, military and other programs for the common good of all citizens, but who decides how much tax we should pay and how to allocate tax revenue to the various categories?
While the government relies on the honesty and accuracy of tax computation of its citizens, the Internal Revenue Service (IRS) occasionally conducts audits to check the accuracy and impose hefty penalties for major errors, whether they result from negligence or deliberate fraud. This is like traffic cops randomly checking speeds of cars to make sure that everyone is driving under the speed limit.
Two recent reports about the IRS caught my attention. First, the so-called “Inflation Reduction Act”, which was signed by President Biden into law in August 2022, has funds to hire 87,000 new Internal Revenue Service (IRS) agents. This has generated speculations that this means more income tax audits for the middle-income Americans. The second report is that the Indian American community which constitutes 1% of the American population pays 6% of income taxes.
My experience with the IRS might be interesting, if not beneficial to the readers in this context. I never worked when I was living in India and had no knowledge about paying income tax. I knew about “black money” and occasional “raids” in the homes of Bollywood celebrities by income tax officers in search of hidden stash.
I came for graduate study in physics as a teaching assistant (TA); subsequently my wife joined me as a TA in the chemistry department. That was when I realized that we had to figure out taxes ourselves at the end of the year, using a tax guide. In any event, our TA incomes were rather modest, tax calculations were simple, and the withheld amounts covered any tax owed.
During our first tax season, the chairman of the chemistry department distributed a standard letter to all TAs stating that one year of teaching experience was a requirement for earning a doctorate degree in the department. It did not say anything about taxes. However, TAs in the department claimed their incomes as tax-deductible, by arguing that the teaching was a required part of the degree based on that letter.
We joined in the foray and for the next two years we claimed my wife’s income to be tax-free to get a couple of hundred dollars each year as “tax refund”; we were ecstatic.
Then came that fateful day. A letter arrived from the IRS basically saying that we were being audited and an audit interview was set up in their office in about two weeks.
On the scheduled day of the IRS audit interview, we showed up at their downtown office on a cold morning, not quite sure what to expect. The IRS officer thoroughly questioned us on the details of the TA’s role. He repeatedly asked if the income was in exchange for a specific service.
The session lasted about an hour. We were later informed by a letter that our claim – of a non-taxable TA income, was denied, and we owed the IRS something like $400 including back taxes, penalty and interest.
We were devastated. Fortunately, we had just enough money to pay the IRS, but it wiped out our savings. I also wondered if this audit would leave a permanent scar on our reputation of being good citizens.
Our tax returns were “audited” a couple of times later in life, but all interactions were done through postal and e-mail correspondence without a face-to-face interview.
That very first audit was ultimately beneficial to me in understanding various aspects of IRS operation and dispelled many myths. The most significant realization was that an IRS audit was not an exercise in fear and embarrassment. The officers treated us very cordially and respectfully. They never implied that we were trying fraudulently to take advantage of the system or just stupid foreigners.
So many people are paranoid about being audited; mere mention of an IRS audit brings an image of a prison cell to them.
However, the IRS does value record-keeping and explanation of any deduction based on sound logic and itemized book-keeping. I wonder if these records can even be fabricated after the fact if they are reasonably accurate. It is extremely rare that the IRS would scrutinize anything amounting to less than, say, $100.
The IRS is not necessarily always right, and one can object to their decisions. I know several instances where a person paid whatever the IRS determined to be the back tax for the fear that any argument with them may result in more severe punishment, thus overpaying.
The Revenue Restructuring Act of 1998 tried to make the IRS more friendly to the taxpayers in response to complaints about IRS abuse. One consequence was the “Offer in Compromise” policy which gives the taxpayer an opportunity to settle large amounts of back taxes by paying only a fraction of the amount owed.
Based on social discussions, the Indian Americans seem to be honest in their tax preparation which might explain their lop-sided proportion among taxpayers. In many cases they might be overpaying taxes by not taking all allowable deductions for the fear of an audit. In my opinion, they should be more aggressive in claiming deductions and must challenge any IRS audit.
I know one Indian doctor who was indicted for not reporting millions he had in a bank in India. Even he avoided a conviction because of his professional reputation; of course, he had to pay all the back taxes, interest and hefty fines.
Two things in life are certain: death and tax. I wish “happy returns” to the readers.
Basab Dasgupta has a doctorate in physics from University of Wisconsin and worked with Sony as Vice President of an operating division. Retired, he now lives in San Clemente, CA.
Disclaimer: The views expressed are not necessarily those of The South Asian Times
