Lies, Damn Lies and Tax Returns...

If you filed your 2003 US tax return before the end of 2003, congratulations! You did the impossible. If you filed before the April 15th 2004 filing date, again, congratulations. You (or your accountant) got the job done in time. If you filed for the extension and make the August 16th extension date you should enjoy a sigh of relief. Because if you didn't and don't qualify for the special 2nd extension tomorrow you will be a criminal.

But wait! Why would anyone take so long to finish their taxes? Missing information? Tax reporting screw-up? Maybe because there is that unfathomable stack of instructions, worksheets, forms and numbers to fill in. Maybe because there are penalties for underpayment and for mistakes (but only those in your favor). Maybe you are stuck in the grey zone between overpayment and underpayment or want to be careful so you don't trigger that evil audit. Maybe it's because even the experts have trouble figuring out some of the tax stuff.

Every year, some US magazine or publication sends out packets with a fictitious, yet realistic set of financial information to a number of different tax experts and compares the responses. Every year they get a range of results. It is amazing that even the "experts" don't agree on an answer. I remember one survey where the answers for a "working middle class couple with a vacation property transaction" ranged from owing a couple thousand dollars to getting a couple thousand dollars back. So, which expert was right? How could any of them be right when none of them got the same result as the single IRS expert in the survey?

A CPA tax accountant told me about how they run into situations, especially with tax law changes, where it is not clear what the "right" answer should be. So they send a letter to the IRS asking for a clarification. Actually, they send several letters to the IRS ... and then use the most favorable response. Yep, even different IRS experts give different answers. Does this make sense? It does if you accept that there is no right answer. Only acceptable and unacceptable answers. I guess when you have an IRS letter to back it up, that answer is an acceptable answer.

The CPA also told me about the file drawer his company had for "special" returns where they tracked the statute of limitations date ... the date after which the return can't be audited. I guess that's another way to get an acceptable answer. Keep good records, hold your breath and hope it doesn't get questioned.

So how is the average taxpayer supposed to avoid underpayment and overpayment? Again, that is not clear. There is (currently) no penalty for overpaying your taxes. It's up to you to find the best acceptable answer ... without getting audited or arrested.

May your return never trigger an audit!