Tax Returns are Fingerprints of Your Integrity

There is a French saying that “you are what you eat.” During the last 35 years I

have reviewed over 5,000 tax returns and have found that they provide a clear

profile of a taxpayer’s integrity. I may not be able to draw a picture of the

taxpayer, but I can confirm their spending habits and negative consumer behavior.

Did you know that 70% of college students have admitted to cheating during their

undergraduate work? Whether you get the answers to an exam or just memorialize

a roommate’s report, it is still cheating. This percentage increases once these free-

spirited college students are in the workforce and start forking over a third of their

paycheck to Uncle Sam.

Listed below is a partial list of consumer traits shown on tax returns.

 Job stability

 Savings changes

 Investment history

 Gambling problems

 Medical expense abuse

 Luxury automobiles

 Home mortgage distress

 Excess charity contributions

How is job stability verified? Each tax return provides a list of employers. Most

taxpayers will not list more than two jobs. However, if the taxpayer lists three new

employers in consecutive years, it is a red flag. I would suggest taking a closer

look at their employers and the related industry. I had one client who worked for

six employers in a year. He sold communication equipment and the only thing I

can surmise is it is extremely easy to move between employers.

The change in savings and investments can provide insight into a taxpayer’s

financial stability. There are two types: a) those who save diligently and b) those

with nothing. Recent inflation has tossed many Americans into this latter category.

Two million Americans receive casino 1099’s and that requires the reporting of

their winnings. The demographics show 400,000 of these folks earn less than

$50,000 a year. The biggest problem is that if you make $10,000 in gambling

income and have $10,000 in gambling losses, you will have to pay taxes on

phantom income. Ever since the IRS increased the standard deduction there are

over 20 million people that no longer itemize tax deductions that allow the write-

off of gambling losses. For example, if you receive $10,000 in gambling income

the IRS increases your tax bill up to $3,000. This represents a double-edged sword.

You win $10,000 but you are $13,000 poorer ($10,000 losses + $3,000 taxes).

The IRS does not heavily enforce medical expenses. I had a client that had her

identity stolen and the fraudster told the IRS that she made a withdrawal of

$150,000 in retirement income. Next, to qualify for a refund, the criminal needed

to reduce her taxable income. They blatantly deducted exactly $70,000 in medical

expenses. The IRS bit on this hook, line, and sinker. The tax frauds received a cash

refund of $9,000 courtesy of an unsuspecting 84-year-old grandmother and IRS

incompetence.

How can you determine if a taxpayer has luxury automobiles? Schedule A tax

deductions allow you to deduct personal-property taxes for automobile license

fees. If the license fees exceed $2,500 it is more than likely the taxpayer owns one

or two luxury automobiles. My experience has shown that people with expensive

cars feel a sense of entitlement and justification of excess deductions.

National statistics show that taxpayers spent 10.5% of their adjusted gross income

on their mortgage. One way to determine if the taxpayer has a bigger house than

they can afford is to divide mortgage interest by the interest rate. Mortgage

balances exceeding $500,000 can strain the taxpayer’s ability to pay.

Next, a good barometer of integrity are non-cash charitable deductions. A family

reporting AGI of $150,000 will deduct $2,500 on their taxes. When the deduction

is greater than $500, the IRS requires the taxpayer to provide detailed information

regarding the type of gift, date of purchase and method of valuation. If a taxpayer

exceeds $8,000 that would fall into the excessive category. Look at the description

of the donations. Were these replaced kitchen appliances or bags of clothing carted

off to goodwill with unrealistic values?

In summary, cheating on your taxes does not become problematic until you get

caught. If you are ever in civil litigation that requires the disclosure of your tax

records, two things can happen. First, in a jury trial, the jurors will immediately be

skeptical, and this could jeopardize your entire case. Second, anyone in the

courtroom will be free to turn you into the IRS for tax fraud.