The IRS and Tax Law – Crazy, Absurd and in Desperate Need of Repair

If this tax law stuff is going to get straightened out, it looks like it will fall on our shoulders. Because our elected officials today just can’t seem to develop any cohesive plan of action, never mind creating tax law that actually makes sense.

Mind Blowers

Roni Deutch has made a habit of noting some of the craziest of the crazy taxes. How about the Alabama card tax?

It seems that anyone who purchases a deck of cards in Alabama must pay a ten-cent “card tax.” The state law fixes the tax for a deck that contains up to 54 cards.

The number of cards makes it very easy to get around the tax. A company can simply create a deck with three jokers for those packs to be sold in Alabama.

Another crazy one is dubbed the jock tax. This one began in California and has been enacted in most states that are home to one or more professional sport teams.

The jock tax is assessed on income earned by athletes. It is also assessed against the wages the athlete pays for personal trainers, agents and any other people the athlete employs.

Not sure that this is what the founding fathers had in mind by everyone is created equal. We know athletes make way too much money but somehow we think our forefathers meant pro athletes should also be treated as equals.

But, for two of the most absurd, we turn to the IRS and the illegal activities that you must report on your income tax forms. First there is the stolen property tax (document page 92, pdf page 94):

“If you steal property, you must report its fair market value in your income in the year you steal unless in the same year, you return it to its rightful owner.”

The key challenge here, of course, is in determining fair market value of your theft.

Then there is the income you earn specifically from other illegal activities (document page 91, pdf page 93). Yes, income from illegal activities, such as money from dealing illegal drugs, “must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.”

That’s right, if you are dealing for someone else, then you report what you were paid on line 21 of your 1040 form. But if you have your own drug business, then you report your earnings on your self-employment tax form Schedule C or Schedule C-EZ.

You Can’t Make this Stuff Up

And in yet another of the sublime, you can’t make this stuff up, tax laws we turn to the Estate Tax. Or as the Republicans like to call it, the Death Tax.

It seems that under President Bush, we abolished the estate tax effective in 2010. That means, regardless of the size of a person’s estate, he or she can pass 100% of it on to their heirs. The government gets nada, zero.

However, because of the potential tax impact on the government, as in not having enough money to run the government, Republicans eliminated the estate tax for the year 2010 only.

Unless Congress acts, the estate tax remains in place for 2009 and will return in 2011. Given the current budget climate and the views of the Democrats, it also seems very unlikely the tax will be reinstated for 2010 or repealed in 2011.

So, in a nutshell, those in the position to inherit sums from an aging relative are hoping that person makes it through 2009 in good stead but then kicks the bucket in the year 2010.

So here is the potential – the heir does everything in his or her power to ensure that the relative survives past December 31st of this year. But next year, the heir has an incentive to see that the relative passes away.

Ouch.

Time to Revamp our Tax Code

If we were really sick we could note that any tangible incentives utilized to facilitate an inheritance in 2010 would need to be reported as income under the IRS illegal activity, a factor that could then make the inheritance taxable. But we don’t want to go there.

Instead, we just note this is our tax law – crazy, absurd and in desperate need of repair.

Man, do we have some work to do.