That Depends On What the Meaning of the Word "Individual" Is.

Do you have to pay taxes? This isn't a libertarian vs. sane person question; politics has nothing to do with it. Under the current situation in the US do you have to pay taxes?

Well, according to Sherry Peel Jackson the answer is a shrug and a resounding "I dunno!"

The former IRS agent and CPA decided that she would find a way to not pay taxes. According to her she could found no clear, legal instruction that she should have to pay up. She did find that taxes are imposed upon "every married individual" but with no definition of the word individual, she just wasn't sure whether or not she was one.

If the definition of the word individual includes the phrase "common sense" I might have to agree with her.

Luckily the jury of her peers did have some common sense - and perhaps a little resentment that they had been paying taxes while Jackson wanted to bring in her $100K per year tax free - and found her guilty. She faces up to four years in prison.

Audits - Be Prepared

In a previous post we looked at the likely-hood of any one taxpayer facing an audit. While the odds are low, every US taxpayer should be prepared for the possibility of an IRS audit.

Anyone that claims deductions beyond the standard deductions should be prepared to defend their tax return. Self-employed worker, small business owners, anyone claiming investment losses or virtually any other financial circumstance beyond the usual salary minus standard deduction scenario should be prepared.

Taking deductions or claiming that certain expenditures are business expenses reduce the total taxes owed. The IRS expects make taxpayers to make such claims. Deciding what is a legitimate deduction or business expense is left largely up to the taxpayer and her advisors. Deciding whether to accept them is up to the IRS and, in the case of an audit, the auditing agent. Therefore surviving an audit depends on being prepared to defend the deductions taken.

Good record keeping is the key to being prepared. Save all receipts and keep them in an orderly way so that if an audit ever happens locating them will be easy. Keep records of all transactions that affect each year’s taxes – both income and deductions. Make sure that all transactions are clear, traceable and can be explained. Maintaining honest and straightforward financial records will offer most taxpayers the ability to survive an audit.

Will You Face an Audit?

Probably not.

It’s the dread of every US taxpayer – the IRS audit. Most citizens only have a vague idea of what an audit is and how to prepare for it. Everyone has heard nightmarish stories of audits – lost receipts, probing questions about deductions taken years ago, and, the worst, owing huge sums of back taxes. The audit has been called the financial equivalent of a rectal examine.

The odds of being audited by the Internal Revenue Service are really quite slim. Of 131 million returns received by the IRS for the 12 month period ending October 2005, only 1,216 were audited. But it’s a perpetual possibility for which everyone must be prepared.

Many taxpayers take the standard deductions and will never have to worry with the years of old receipts and financial records from the past. In fact if the IRS decides to take a look at the tax history of a citizen who has only taken standard deductions, chances are she will never know that she was investigated. The IRS agents will simply look at her past returns, see that she took the standard deductions, and move on to the next taxpayer.

Ron Paul Backs Down on IRS Position

In my last entry I promised to take a closer look at Ron Paul's position that the IRS should be shuttered. In a combination of promising to return the US's coffer-keeping to the perfection of a yesteryear that never actually existed and some really fuzzy math, Paul's website laid out an interesting if overly simplistic argument for getting rid of income taxes.

I planned to spend this month examining this position and exploring its feasibility from the perspective of political, economic, business, and international relations concerns. But that isn't going to be.

For whatever reason, Paul's site has removed that language and replaced it with some mealy mouthed complaints about high taxes. I'm fighting the temptation to take credit for this apparent reversal of positions in the Paul camp by threatening to put his plans for closing the IRS under a microscope.