Author Topic: Why is my sister withholding information about our tax disparity?  (Read 4346 times)

AMandM

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From Carolyn Hax's relationship advice column in the Washington Post:

https://www.washingtonpost.com/lifestyle/advice/carolyn-hax-why-is-my-sister-withholding-information-about-our-tax-disparity/2020/02/07/2e9d6132-447f-11ea-aa6a-083d01b3ed18_story.html

Quote
Dear Carolyn: My sister and I are open with each other. This year we got a frightening tax bill and I vented to her. She was sympathetic but didn't commiserate. I found this a little strange given what I know about her finances.
It bugged me enough to ask her how much she owes, and she said she was getting a refund but wouldn't say how much. I was floored. I asked her for more details, including who she used for tax prep, and she refused to divulge them. I am jealous she is paying a lot less and also concerned about whether what she's doing is even legal. Can I bring this up to her again? And how do I do that?

I love the bolded part especially.

Hax set her straight, both on the arithmetic and on butting out of her sister's business.

Kris

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Re: Why is my sister withholding information about our tax disparity?
« Reply #1 on: February 08, 2020, 08:43:05 AM »
Wow. Depressing that the OP is that ignorant about taxes. Sheesh.

OtherJen

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Re: Why is my sister withholding information about our tax disparity?
« Reply #2 on: February 08, 2020, 09:19:23 AM »
Wow. Depressing that the OP is that ignorant about taxes. Sheesh.

Pretty sure she isn't alone, sadly. Filing self-employment taxes as a sole proprietor for the last 14 years was a major education (and probably the single biggest trigger for financial responsibility). Too many people just let their employers and tax professionals deal with all of it and never bother to understand even the basics.

Chris Pascale

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Re: Why is my sister withholding information about our tax disparity?
« Reply #3 on: February 08, 2020, 04:38:39 PM »
Someone asked me about whether they should fudge their taxes to get $6,000 of the Earned Income Credit.

Part of the reason they thought it was a good risk to take was because after some googling, they found that only 0.4% of the population gets audited.

What I explained was that something like 99.6% of the population fills out their taxes correctly, which means no review of their taxes is necessary. For example, my return is more complicated than the average return, especially the years I had state returns for NY, NC and LA.

I also let them know the following, which I'm very well-versed in: (1) Under-reported income is picked up automatically, and the examination of your taxes will be started not by an eagle-eyed IRS employee, but by a computer (the robots are here), (2) The EIC is the biggest program the IRS examines because of how frequently people who claim it should not, and (3) This might hold up your actual refund for months or more, but even if you got the big refund because it initially slipped through, the IRS has 7 years to catch up to you. It's not if, but when, and when they do, you'll likely have a 20% penalty attached, as well as interest.

Bloop Bloop

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Re: Why is my sister withholding information about our tax disparity?
« Reply #4 on: February 08, 2020, 11:46:09 PM »
Only a small portion of the population gets audited and most audits only occur if your deductions exceed the usual percentage figures for your profession. So if you want to be a little shifty with your tax it's very easy to know where you can likely get away with it. There's a basic cost/benefit analysis to be done. It depends on the jurisdiction I guess - in my jurisdiction the penalty for non-compliance is essentially a moderate fine, without any criminal sanction.

Obviously you can't under-report income (unless it's cash in hand) since wage, dividend and capital gains income is automatically picked up; but it's easy to mischaracterise expenses, or simply take a liberal view when it comes to apportionment of work/private expenses. In fact the latter strategy isn't even improper; taxpayers are entitled to be self-serving. I would never advocate for breaking the law, but there is a lot of legitimate grey area within the law which you can operate in, if you would like to. You do have to think about the general guidelines though because any claim that exceeds the average for your profession by a large amount could trigger an investigation.

Michael in ABQ

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Re: Why is my sister withholding information about our tax disparity?
« Reply #5 on: February 09, 2020, 02:41:52 AM »
If you're a W-2 employee you don't have much room to commit tax fraud except when it comes to claiming dependents or massive deductions. Since each dependent you're claiming requires a social security number it should be pretty simple to match those up and see if multiple people are trying to claim the same one. If you make $100,000 and claim $50,000 in charitable deductions then you're far more likely to get audited.

If you have a business though - it's pretty easy to just not report income. For instance, I sold about $10k on Amazon last year. After cost of goods sold and selling fees it will be a few thousand in profit which I will pay taxes on. Amazon doesn't provide a 1099-K unless you sell over $20,000 per year. So, that means they probably are not reporting to the IRS that I sold anything. If I wanted to commit tax fraud I could simply not report all that income and there's a 99% chance I'd get away with it. However, my integrity is not worth several hundred dollars in taxes.

Or I could claim that my expenses were $9,800 and only pay taxes on $200. However, that would be more likely to trigger an audit because the IRS has enough data to know that expenses for that type of business should be say 70% of revenue, not 98%.

cupcakery

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Re: Why is my sister withholding information about our tax disparity?
« Reply #6 on: February 09, 2020, 06:25:34 AM »
I'm amazed by how many of my friends and employees don't understand that withholding is not their tax rate. Some people will listen if you try to explain it, but many have their minds made up.  Last year all I heard was, "But I usually get a refund!  My taxes went up."  Did you change your withholding?  How did your tax rate change?  Were there any differences in income, etc.  "But I usually get a refund!  My taxes went up."  My CPA friend kept showing clients how their tax rates went down and they were still crying about not getting a refund and how their taxes went up even if their effective tax rate dropped.  Facepunch.

Sanitary Engineer

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Re: Why is my sister withholding information about our tax disparity?
« Reply #7 on: February 20, 2020, 10:09:01 AM »
Wow. Depressing that the OP is that ignorant about taxes. Sheesh.

This is how I found MMM.  I mean, I understood that I prepaid taxes and essentially loan the Feds money each year.  Last year I couldn't believe how little in tax my family paid and my internet searches lead me to this forum.  Now I understand the broad strokes.