How Retirees Pay Zero Taxes

[brett]

So, you typically have 2-4 years of tax returns. If the taxpayer consistently donates large sums to certain denominations that are well known for tithing, then that is a good clue as to what the income should be. This assumes that the tithe is 10 percent.

So, if a person consistently had donations of say $6000. per year to XYZ church, and at the same time was only reporting income of $25,000 then chances are fairly good that the return would be examined and potentially audited.

Alternatively, some disreputable church members have been know to 'sell' tax receipts. These people do it often and become known. So if a return is pulled with a huge donation receipt (not for an in kind donation) and there have been little or no donations like this in the past, then chances are that that the return and and organization that provided the receipt will get looked at.

 

[Beryl]

Years and years ago, in another life, I worked for the Canadian version of the IRS. I was in a group that conducted personal and business audits.

Computerization was used to scan returns for anomalies, but those that were got spit out were reviewed by our supervisors.

One type of return ALWAYS got marked for audit. It was the returns where the individual appeared to tithe at 10 percent. But when the donation and the income were matched, the numbers did not jive.

Invariably, on those returns that were selected for audit, the charitable donations were spot on.....while the income was understated by a considerable amount. They were the easiest audits for us as we had a goal of how much we should be recovering per hour of audit.

Interesting.

Mom, an ordained minister, tithed to her death in April and I'm not positive about Dad but churches and other charitable organization spoke of his generosity at his funeral 12 years ago. I remember once in the 70s my parents was audited. It resulted in them getting a lot of money back because of unreported deductions (including donations). It became the family chuckle that we "schooled the IRS" and no one in our family was ever audited again.

These days it is pretty easy to tell if income/donations jive because so much is reported even before we file.

 

[truenorth418]

What was this thread about?

Oh, I remember now. Actually I was proud to be able to structure my finances so that my federal income tax last year, my first full year of retirement, was zero! Probably the first time since I was a young teenager.

+1. I am currently projecting a 0% federal tax bill this year. This is primarily because I will withdraw a very modest sum from my investment portfolio to live on this year. Another factor is that I pay one of the highest combined state/city income tax rates in the country (NYC) and this state/local tax is deductible on my federal return.

I do not feel guilty about it. This is the tax system that our elected representatives agreed on and implemented, and I am paying what is required of me.

I retired 2 years ago after almost 25 years in the workforce. I recently calculated that I have paid over 35% of all of my lifetime income to various levels of government to income related/payroll taxes. Think about it. More than one third of every dollar I earned has gone into the public trough, not including property taxes, sales taxes, and all the rest. I'm sure others on the board have paid something similar.

Furthermore, the combined income/payroll rate during my final several years of work easily exceeded 40%.

To pay 0% now in early retirement feels kind of surreal, but it is what it is.

 

[youbet]

So, you typically have 2-4 years of tax returns. If the taxpayer consistently donates large sums to certain denominations that are well known for tithing, then that is a good clue as to what the income should be. This assumes that the tithe is 10 percent.

So, if a person consistently had donations of say $6000. per year to XYZ church, and at the same time was only reporting income of $25,000 then chances are fairly good that the return would be examined and potentially audited.

Alternatively, some disreputable church members have been know to 'sell' tax receipts. These people do it often and become known. So if a return is pulled with a huge donation receipt (not for an in kind donation) and there have been little or no donations like this in the past, then chances are that that the return and and organization that provided the receipt will get looked at.

Interesting that the profiling would be confined to Christian churches as opposed to all charitable giving. Politics is at play everywhere I guess....... Or that group is more naive in terms of executing the due diligence required to avoid getting caught. That's sometimes the case with ethnic minority storefront churches here in Chicago. Perhaps you were tageting similar up there.

 

[travelover]

Interesting that the profiling would be confined to Christian churches .........

How do you know that it was Christian churches? I missed that.

 

[ERD50]

How do you know that it was Christian churches? I missed that.

Google says "define Church" ...

noun /CHərCH/ 
churches, plural

A building used for public Christian worship
- they came to church with me

A particular Christian organization, typically one with its own clergy, buildings, and distinctive doctrines
- the Church of England

The hierarchy of clergy of such an organization, esp. the Roman Catholic Church or the Church of England

-ERD50

 

[MichaelB]

As Yoda would say, if he lived back in the Round Table days,

Strayeth from its path right and true, doth this thread, methinks. hey hey hey

 

[youbet]

How do you know that it was Christian churches? I missed that.

ERD50 seems to have answered this satisfactorily with the simple use of Google and/or a dictionary but I'll add.......

I highlighted the words that tipped me off. Did you note that?

"Church" and "tithe" are commonly used in reference to the Christian religion. For all I know, they might be used in other contexts I'm not familar with. It's not worth researching. My point was that the Canadian version of the IRS was profiling a specific subset of charitable giving and in this case it seemed to be (based on the poster's choice of words) gifts to the Christain church. Sometimes down here, that kind of profiling is frowned on. Sometimes not. Whatever. If the poster had said that they were profiling and going after the broader category "all charitable givers whose gifts seemed disproportionate to the level of income they reported," that would not have tweaked my interest.

 

[travelover]

..........
"Church" and "tithe" are commonly used in reference to the Christian religion. For all I know, they might be used in other contexts........

Thanks. I was raised a Pagan, so I thought that tithing was a generic term for giving to a religious affiliation. Continue on with your outrage.

 

[youbet]

Thanks. I was raised a Pagan, so I thought that tithing was a generic term for giving to a religious affiliation. Continue on with your outrage.

You're welcome.

Yeah, I'm aware that many Pagans are "outraged" these days. BWTF, ya just can't dance around the bonfire every night........

 

[brett]

My use of the word 'church' was in no way intended to imply any particular religious group.

My intent it it's use was to refer to all faiths/religions/groups. It is unclear to me how anyone could interpret this as a political comment. This is about taxes, not politics.

 

[pb4uski]

Got it.

 

[youbet]

My use of the word 'church' was in no way intended to imply any particular religious group.

My intent it it's use was to refer to all faiths/religions/groups. It is unclear to me how anyone could interpret this as a political comment. This is about taxes, not politics.

Understood brett. Just a poor choice of words on your part.

 

[haha]

This is about taxes, not politics.

That's rich. I suppose it is completely clear that tax has nothing to do with politics?

Ha

 

[MichaelB]

My use of the word 'church' was in no way intended to imply any particular religious group.

My intent it it's use was to refer to all faiths/religions/groups. It is unclear to me how anyone could interpret this as a political comment. This is about taxes, not politics.

Your intent was clear, and there was nothing wrong with your choice of words. No need to apologize. Forum members everywhere are experts at mining inferences, especially the rich grounds of taxes, politics and religion.

 

[pb4uski]

So basically it was a form of profiling. XYZ religion typically tithe 10% of their income and their reported donations > 10% of income therefore we'll audit them?

While off-the-cuff it seems objectionable OTOH if the taxpayer has cheated then I guess they deserve to get caught.

For those who did cheat, it is fascinating to me that they are devout enough to tithe but at the same time willing to lie on their tax return.

 

[eytonxav]

Forum members everywhere are experts at mining inferences, especially the rich grounds of taxes, politics and religion.

This statement should be added to the FAQs as a Warning Stickie

 

[brett]

It was absolutely NOT profiling. Why do people immediately go down this road?

It was all math. The computer does not see a name or receipt. The computer sees income of 20K and donations of 6K....so it gets spun out for review.

It would also get spun out if expenses went up by a large amount and the capital cost depreciation schedule increased by a large amount. The computer is programmed to suspect that someone expensed and also capitalized a large capital item. Just as it would if you claimed single for five years and then all of a sudden claimed that you had five kids/dependents or if a salespersons auto expenses went about a certain percentage level.

No profiling, just a computer cross checking many things to arrive at a decision that a return should be further examined. Are you really suggesting that this is profiling?

 

[pb4uski]

I guess based on the first two paragraphs of your post #101 it appeared to be profiling in that it was comparing the ratio of donations to income with what would be expected based on the typical percentage of a denomination well know for tithing in that in your example the $6k of donations would exceed 10% expected given the taxpayer's religious affiliation:

So, you typically have 2-4 years of tax returns. If the taxpayer consistently donates large sums to certain denominations that are well known for tithing, then that is a good clue as to what the income should be. This assumes that the tithe is 10 percent.

So, if a person consistently had donations of say $6000. per year to XYZ church, and at the same time was only reporting income of $25,000 then chances are fairly good that the return would be examined and potentially audited.

As you have clarified it in post #118, the flagging was just more where the relationship of donations to income exceeded certain parameters (which could be applied irrespective of religious affiliation).

If it was the former it certainly has aspect of profiling to me, but not if it was the latter.

If you had just described it as where donations exceeded a certain percentage of income rather than bringing the religious affiliation of the taxpayer into the explanation then I don't think anyone would have thought that there might be profiling going on.

 

[travelover]

My understanding is that the self employed get audited more often. I wonder if that is profiling.

 

[MichaelB]

 

[target2019]

My understanding is that the self employed get audited more often. I wonder if that is profiling.

This probably fits into the same category as charitable deductions. IOW, you are using additional blocks/forms, meaning you have greater exposure to audit triggers that are set.

I wouldn't call it profiling, as that term has taken on a different meaning in our new world. But it is profiling in the general sense.

Dang, I hate words. They're supposed to mean something.

 

[brett]

In Canada, certain groups can be singled out for review or for 'projects'

As an example, if it is found that an abnormally high number of, lets say, real estate agents, are being reassessed for similar items/issues, the tax dept. may do a larger sample of real estate agents to see what the results yield.

If those reviews result in significantly higher re-assessments (more tax revenue) than the average population, then the tax department may in fact institute a project to give real estate agents a special 'review'. |That review may only involve checking/verifying one or two line items on the return or it may involve a full audit. It is all based on math and statistics.

When I was a commissioned salesperson, I knew generally knew what range the business portion of my automobile expenses should be in order to avoid 'audit attention'. Notwithstanding that I was still audited. It was a simple 'desk audit'...I just had to send in my receipts. In this instance they were satisfied and did not ask for a mileage log. They could have, but I suspect that since the receipts were in order, and the business percentage claimed was in line, the auditor closed the file. They make decisions based on personal judgement and on the likely 'audit yield' of a potential re-assessment.

I worked for a manger who could pick up a return that the computer had selected for review, and tell you exactly what to look at first-even if the ratios appeared reasonable. Some of these folks just know. Experience I guess.

 

[youbet]

If you had just described it as where donations exceeded a certain percentage of income rather than bringing the religious affiliation of the taxpayer into the explanation then I don't think anyone would have thought that there might be profiling going on.

+1

 

[Onward]

Here is Rick Ferri's response to the original Forbes article.

Avoiding Taxes As A Retiree Isn’t So Easy