One good reason
Issue #93 • May/June, 2005
The other day Backwoods Home Magazine got a notice of a “tax increase” from the IRS. We’ve gotten quite a few such notices through the years. This one was for $3,802.49 including over $600 in penalties and interest charges. There was no explanation as to why this “tax increase” is due (I’m not sure we’d understand the reason even if it was explained), but the threat of more penalties was very clear.
These notices seem to come at the worst possible moments. This one not only came during this issue’s deadline, but it came while the accountant we must retain to figure these things out was up to his own eyeballs in the April 15th tax filing deadline. But we couldn’t deal with this notice even if we had the time because too much of the tax code is incomprehensible to even the smartest of businessmen. So off to the accountant it went—at $140 an hour.
Usually, he calls us back on these matters and says, “Don’t pay it. You don’t owe it.” Fine. Then he notifies the IRS with the reasons why it’s not owed (while still billing us at $140 an hour) and it’s settled. So, whether we pay the IRS or pay the accountant, we’re out dough. And on the occasions we do owe it, we have to pay them both.
These tax notices cannot be ignored, even when the assessment is small, because if left unpaid, interest and penalties pile up. What starts out as a small problem becomes a big one, and when they get big enough, the IRS can take your property, take your business, and even send you to jail. So, when the small ones come in, we have to judge the size of the tax assessment, along with its interest and penalties, against the accountant’s fees and determine which is smaller. If it costs less to pay the IRS than to pay the accountant, we pay the IRS, even though if past history is a track record, we probably don’t owe it. Every one of these notices cost us money no matter what.
The cost of an incomprehensible tax code is greater than just the cost to businesses to comply. There is a national cost, as well. The amount of talent that is wasted to the nation just trying to figure out how to deal with the tax code is enormous. Men and women who should be looking for cures for cancer, creating products and manufacturing processes to make us more competitive in world markets, teaching our youth, etc., are instead committed to trying to make sense of bureaucratic nightmares.
There have been various prescriptions for dealing with the current tax code. A flat tax, a national sales tax, or a consumption tax have been suggested and each would cure some of the problems. But each also creates its own problems. Just as an example: with a national sales tax, compliance becomes a problem. One of the things Canadians have learned with their national sales tax is that it has led to smuggling, just as states in this country have discovered that smugglers try to import cigarettes from low cigarette tax states to states with higher taxes. On top of that, one legal way to avoid a national sales tax would be for consumers to reduce spending, and many economists fear that is a recipe for a recession or worse. And if that’s not bad enough, a national sales tax will make it easier for Congress to raise taxes. Other tax schemes will create other problems that are beyond the scope of this column.
What is needed, no matter what kind of tax structure we have, is a clear, concise tax code, one the average businessman can comprehend so when he (or she) gets a notice from the IRS he can understand the assessment, and if he feels it’s unfair he can argue against it—without needing a high-priced gun to keep him solvent and out of jail. With what we have right now it’s hire the high-priced experts or perish.
The costs to you
If you think this is just us whining about a personal problem that doesn’t really affect you, consider this: the costs to businessmen to stay out of trouble affects us all. Like any other business, we have to pass along all our costs to our customers if we’re to stay in business. That’s higher subscription costs and higher newsstand prices to you, and higher advertising rates to our advertisers. Also, keep in mind that our suppliers including our printer, our distributor, and all their suppliers have to pass their costs on to us, and we have to pass those costs on to you, too. And it’s not just us. Your groceries, your gasoline, your home, and almost everything else you buy has hidden costs as businessmen struggle to comply with the tax codes. Scott Moody, senior economist for the Tax Foundation, estimates that the total cost of tax compliance for all businesses in the United States runs to more than $100 billion per year. For a family of four, that comes out to over $1300 a year in hidden costs.
Despite congressional tax hearings of a few years ago, the tax code is still confusing. It still behooves us to retain experts to stay out of trouble and stay in business. But a clearer tax code, one that even you and I can understand, is something Congress could mandate right now. So why don’t they?