November 24, 2004

I'm very sorry to be correct on yet another prediction I made several moons ago: The IRS is ratcheting up its audits in order to pay for Bush's massive war debt. According to a 11/19/04 Associated Press article written by reporter Mary Dalrymple, the IRS increased its audits of "wealthy" taxpayers this year, and collected a record $43 BILLION dollars in unpaid taxes. They are so proud of their achievement, they are asking Congress to grant them an additional $500 million dollars to "expand efforts to track down tax evaders".

That $43 billion dollars collected is 4 times greater than the IRS' annual budget of $10.2 billion dollars, which represents an excellent return on investment. In fact, if we could invest in IRS stock, now would be the time to do it.

This year, the IRS audited 40% more "high-income" taxpayers who made more than $100,000.00. Let me assure you that people who live in the San Francisco Bay Area do not regard $100,000.00 to be a high annual income. In fact, with home prices, and therefore home mortgages skyrocketing, a gross of $100,000.00 nowadays doesn't go far. After taxes are withheld, you are actually living on around $58,000.00, or $4,800.00 per month, and a modest home mortgage in the Silicon Valley will often eat up $2,500.00, leaving a family with a whopping $2,300.00, or just over $500.00 a week to live on. No wonder hardly anyone is putting any money in savings. There isn't anything left to put, and what you can't afford to pay for as a necessity, will be added to your credit card balance, or you'll suck the equity out of your home through refinancing as values rise. Either way, it isn't income you'll be spending. Think of it as mortgaging your future, and you can forget about retiring. Ever.

Anyway, the article goes on to read that IRS audits of those with lower incomes increased 15%. Interestingly, audits of small businesses dropped 50%, while audits of major corporations climbed to 1 in 6, and 40% of corporations with assets of $250 million or more were audited.

Now here's a figure that floored me: The average tax collection from high-earners (over $100,000.00) who had face-to-face audits was $27,600.00, while "mail audits" of the same group averaged $15,110.00. That's a lot of money from each audit! Why are we not hearing horror stories? If these figures the IRS has released are true, how come we aren't hearing about thousands of taxpayer citizens who have been economically ruined by such collection efforts like we did a few years ago before Congress decided the IRS had gone too far too many times? Hmmm.... I just don't know.

Now here's a quote that'll give you a lump somewhere: "Overall, these audit rates, while we've made progress, are still too low.", said IRS Commissioner Mark Everson. "We have more work to do."

Uh-oh.

It should be noted that self-employed, small businesses and their owners were always heavily targeted in the past by the IRS for padding business deductions, and if small business audits have dropped by almost half, then why? Worden's Theory is rather simple: Most small business owners are lifelong Republicans, as well as being consistent Republican Party donors, and if that is correct, Everson's efforts are being directed by the Bush Administration from top to bottom.

In the article I wrote predicting this looming taxpayer persecution, I pointed out that today's taxpayers are routinely padding their reported income with "under-the-table", non-reported income just to make ends meet. An IRS face-to-face audit will usually reveal that hidden income because the reported income is just too low to support the actual spending outlay of the taxpayer.

For example, if an employed taxpayer has a reported income of $50,000.00, he or she is usually living on $35,000.00 after taxes are withheld. That's just under $3,000.00 per month, so if the mortgage is eating up $1,500.00 of that, and car payments account for another $500.00, the family has just $1,000.00 left over for groceries, gasoline costs, insurance, etc. If the IRS finds the taxpayer is spending $2,000.00 per month for those everyday expenses, then they know you have $12,000.00 in annual unreported income OR you borrowed the extra from somebody OR you took the extra money out of the value of your home through refinancing OR you stole it and the latter is still unreported income. If you can't prove that extra money you spent came from a non-taxable source, then get out your checkbook and be ready to pay taxes, penalties and interest.

See how easy you are to catch? Families are being so heavily squeezed now, that generating unreported income is a national trend, and the same article reveals the IRS is just now finishing a national study to measure tax evasion. They didn't have to. Catching tax "cheats" is easier for the IRS nowadays than it is for a traffic cop to nail a DUI driver heading home at 2:00 AM on New Years Day. It's like shooting fish in a barrel.

The IRS has also been stepping up efforts to discourage the tax protest movement. Former IRS Collections Agent Joe Bannister of San Jose, California has just recently been indicted by a federal grand jury and arrested. Bannister left the IRS after becoming convinced the IRS Code did not apply to most domestic income, and he has clients who have followed his lead. I suspect Bannister and his clients will be railroaded at trial, but we'll see. If they pick an open-minded jury, the IRS just might rue the day they made the decision to go after Bannister, because he has his ducks in a row where the IRS Code is concerned. But you can't expect a federal judge, who gets paid by federal taxpayer income, to be fair, so I would expect the good judge to refuse to allow Bannister to present the defense he knows would acquit him. I can't wait to see how this case plays out.

I think the Tax Code, as we have known it, is about to go through a needed change that most Americans will welcome. President Bush has made it known he favors a tax code/tax collection change. There is persistent talk of a "flat tax" on all income, but you must remember that the flat tax proposal will keep the IRS and its taxpayer audits in operation, because income will still have to be declared and audited. That is exactly what most thinking Americans don't want. If the federal tax collection process is to be changed, they want to see a real change that makes the IRS an awful memory.

The best idea so far is a federal sales tax that replaces all federal income taxes, including FICA. The tax collection takes place when the income is spent, rather than when earned. If you earn $100,000.00 annually, you take home $100,000.00 annually, and you pay the federal sales tax as you spend your income. The federal sales tax idea also puts an end to individuals having to file tax returns and having to pay hundreds of dollars annually to professional tax return preparers.

The only possible downside to the federal sales tax proposal is in establishing an accurate percentage of spending that will replace the income generated by the current system. I've seen some figures that go from 17% to 24% and even higher, and how would we know if the feds were lying? They could effectively saddle America with a tax increase by that means, and we'd all have to grin and bear the burden.

I don't believe the people estimating the proposed percentage figures for the federal sales tax realize the vast amount of un-taxed income currently being generated in America, and I'm not just referring to illegal drug proceeds and unreported incomes from occupations like prostitution.

Home landscaping service income and other income from domestic services like house cleaning are almost never reported or declared. Some people raise popular dogs and sell the puppies. Three breeding pairs can each easily produce 8-12 pups per year, or a minimum breeding yield of 24 puppies. The popular breeds usually command prices of $500.00 - $800.00 per pup, so on a good year a breeder can count on around $12,000.00 - $18,000 in extra annual tax-free income before dog food and veterinarian costs are figured. People routinely go to private garage sales to pick up items of value for pennies on the dollar, then take them to flea markets where they sell the same items at substantial profit. That income doesn't get reported or declared either. I could go on and on.

What I'm suggesting is that a federal sales tax will produce more revenue than even the most astute professionals are estimating, because all income, no matter how it is derived, gets taxed when spent. Paper money doesn't do much good when it is stuffed in a pillow, so if a person wants to enjoy their income, no matter how it is derived, they'll have to spend it one way or another, and that is when it gets taxed. You don't get yours until they get theirs, got it?

But in the interim, look for a substantial and probably vicious tax collection effort by the IRS that could surpass all of their past abuses. They have a green light from the Bush Administration, which is completely comfortable with the operation because in their minds it targets "cheaters" who don't pay their fair share. This just happens to be one plank in Bush's plan to pay down the massive debt he's generated, so if you get tagged by the IRS, try to take some comfort that you are aiding the war effort as your local sheriff sells your house at auction.

Beware: The Tax Man cometh.

Carl F. Worden

Editor's Note: All that "unreported income" will simply morph into "unreported sales". The black market is alive and well everywhere governments steal the productivity of the people. Unfortunately, those who are harmed the most by any tax and spend government are the very poor and defenseless that they pretend to "help". They seldom have any access to the black market and are the easiest to catch and "make an example of". The only thing government is really interested in is self perpetuation and growth. Don't forget it. MamaLiberty

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