How many times have you heard someone say, “I don’t pay any taxes. My accountant takes real good care of me . . . I haven’t paid a dime in taxes in years.”
Does that outrageous statement sound familiar? Maybe it’s your brother-in-law, or a fellow soccer mom, or a co-worker at the office.
And so you think to yourself, “What am I doing wrong? How come I’m paying taxes and so-and-so says he/she pays nothing? How do they do it!” Is it really possible to pay “zero taxes”?
For purposes of this article, let’s give your “no-tax” friend or relative a name. Let’s call him “Charlie” (or if he is a she, just think “Charlene”).
Okay, what is Charlie up to? What’s his secret?
Charlie has no secret. He’s not doing anything that you should be doing. Do not be envious of Charlie, and here’s why . . .
I can think of at least five reasons you should ignore whatever Charlie says about his “no-tax” situation.
REASON #1: Charlie is a liar. Every family has one, so don’t feel bad. Let’s face it, some people just like to indulge in fabrications to make themselves feel good. Charlie is telling you a big fat lie because Charlie has “issues.” ‘Nuff said?
REASON #2: Charlie is pond scum. Okay, hear me out on this one. I don’t mean to offend you if Charlie is a close and dear relative, or your best friend, but I’m going to give it to you straight: Charlie cheats on his tax return, and he cheats big time. There are plenty of folks out there like Charlie. He’s one of the reasons that you and I pay so much in taxes – he doesn’t report all his income, and he deducts bogus expenses by the thousands.
He and his accountant may even be in cahoots on this. Charlie brings in his records and his accountant crunches the numbers, then calls Charlie and says, “You owe $5,000.” So Charlie rummages around in his files and somehow manages to come up with another batch of expenses that miraculously reduce his balance due to zero. It’s like magic!
End result: Charlie’s tax return is a big lie.
Charlie is a thief. Charlie should be put in jail for the tens of thousands in taxes he has illegally withheld from the government over the years.
REASON #3: Charlie is stupid. Again, I’m sorry if I’m being too hard on Charlie. But some people are so clueless about taxes that if they have no balance due on their return, or if they are getting a refund, they mistakenly believe they didn’t pay any tax that year. And, believe it or not, this is actually a very common misconception that thousands of people cling to. Ah, to be so blissfully ignorant!
I hope you are not so naive to think that the “bottom line” on your tax return tells the whole story about your tax liability. It doesn’t.
REASON #4: Charlie is broke. Charlie may actually pay zero taxes because – are you ready for this one? – Charlie doesn’t make any money!
Charlie owns a small business or works full-time at his self-employment activity, and Charlie may rake in hundreds of thousands in income from sales of his product or service – but Charlie’s business spends more than it brings in, and Charlie’s business has a loss every year. So Charlie doesn’t really have a tax problem. Instead he has any number of other problems. He has a marketing problem, or a management problem, or a personnel problem. Charlie’s business is failing, and paying zero taxes is just a symptom of a business that will eventually close.
REASON #5: Charlie is just scraping by. Charlie’s business may not be losing money every year, but it’s not really making much either. He has a small profit – enough to keep him busy. His business may even “look” profitable, but it’s really the classic shoestring operation.
So now, I ask you, do you really want to pay zero taxes? People who don’t pay taxes are usually in one of these five categories: Chronic Liars, Pond Scum, Stupid, Broke, or Just Scraping By.
The purpose of business is to be profitable. The unavoidable result of a profitable business is taxes. And yes, you should do everything legally possible to reduce those taxes. But if you are going to be successful, you are going to pay some taxes.
When it comes to taxes, stay away from Charlie.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.