As the midterm elections wrap up and candidates start throwing their hats in the ring for the 2024 presidential race, you're likely to hear more and more conversations about how "the rich" are cheating on their taxes.
Those who start this dialogue take the idea as truth. The IRS commissioner, for example, is on record estimating tax evasion costs the U.S. $1 trillion a year, mostly from wealthy individuals and large corporations. And the recent Inflation Reduction Act included $80 billion in new funding for the IRS to go after tax evaders, with the understanding that the problem lies with those making $400,000 a year or more.
Are there tax cheats? Sure. No one likes paying taxes, and, unfortunately, there are always some unscrupulous people who think they are above the law. But in my 40+ years as a CPA, both with my clients and in my experience with my network of more than 60 CPA firms around the country, it's not the rich who are cheating.
Why? They don't need to. But more on that in a minute.
The biggest problem with this idea that the rich cheat on their taxes is that it distracts people from something far more important: understanding how tax laws really work. Having this information — and a strategy to act on it — is what allows some people to build wealth while paying little to no tax. Meanwhile, those who lack this knowledge are left carrying the tax burden.
Another problem with the widespread belief that the rich cheat on their taxes is it leads to other people cheating too. "If the rich cheat," this thinking goes, "why shouldn't I?" And, as more and more people justify bad behavior, they undermine the entire system.
People who are cheating on their taxes are typically doing one of two things: hiding income or taking deductions they shouldn't. In my experience, they tend to be small business owners or solopreneurs making around $100,000 to $200,000 a year who morally don't see anything wrong with cutting corners. They might offer some customers a discount for paying in cash that then isn't reported as income, improperly pay their employees as contractors or overstate the value of charitable donations or other deductions. They weigh the risk of getting caught against the decrease in their taxes and decide to roll the dice.
The rich, with very few exceptions, aren't motivated to cheat. As long as they're working with a CPA with a strong tax-reduction system, they are building wealth that isn't taxed or is taxed at a much lower rate, and they are doing so legally. You don't need to cheat if you follow the guidelines laid out by the government for reducing taxes.
If the rich are doing things differently, is there a way for the average person to adopt these strategies too? Absolutely.
The U.S. tax law is about 6,000 pages long, but the basics are pretty simple. There's one line that says all income is taxable unless they say it's not, and another line that says nothing is deductible unless they say it is. Then, there are a few dozen pages of charts and tables to tell you how much tax to pay. The remaining 5,900-plus pages are a guidebook to tax reduction. If you want to do what the rich do, you need to follow the guidebook and work with a CPA with a proven system for successfully doing so.
The guidebook gets quite technical, but it broadly follows a simple pattern. The government offers tax deductions and tax credits to incentivize individuals and businesses to do things it wants to be done. I've studied the tax laws of 15 countries and found governments worldwide want the same things; the government wants people to create jobs, develop new technology, build housing, provide food, supply energy and invest in their retirement. The more we do what the government wants to be done, the more tax incentives we receive and the less tax we pay.
These tax benefits aren't loopholes. They aren't mistakes. They aren't even solely the result of heavy lobbying by the rich. They are tax incentives the government chooses to give to encourage specific behaviors. The particular incentives may shift and change depending on which political party is in power, but incentives are always available.
As a taxpayer, you have a choice. You can bemoan the system, or you can decide to make it work for you and your family.
"The rich" aren't cheating on their taxes. They're just doing things differently. Perhaps it is time you consider joining them.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
