Walt Eddy's Blog - Posts Tagged "writing"

Well, maybe I've given you enough time (see my post on February 19th) for now to think about Doug’s chances relative to his taxes and the risks he'd be taking with IRS.

Way back on March 3, 2005, Peter Jennings wrapped up a newscast by saying, “Finally here this evening, one very large tax bill. The government says it has never seen anything like it before. Walter Anderson, a multimillionaire businessman, appeared in a Washington, D.C. court today, accused of failing to pay more than $200 million in taxes. The government alleges that Mr. Anderson used several elaborate schemes to hide his considerable income. It's a lot of money.”

(How a guy like that ever got my name, Walter, makes me wonder.)

Anyway, that’s $200,000,000 smackers of taxes. That's a lot of money. Any normal person would ask himself: with government going after the likes of Walter Anderson and getting that large a return on their investment in resources, why would IRS operatives even care if Doug deducts the measly costs of his trip to Vietnam to get pictures depicting oversized loads on motorcycles?

Then a few months later, on August 29, 2005, the IRS reported that the accounting firm KPMG LLP (KPMG) had admitted to criminal wrongdoing and agreed to pay $456 million in fines, restitution, and penalties as part of an agreement to defer prosecution of the firm. In addition to the agreement, nine individuals—including six former KPMG partners and the former deputy chairman of the firm—were headed for criminal prosecution in relation to the multibillion-dollar criminal tax fraud conspiracy. The fraud per the IRS and Justice Department related to the design, marketing, and implementation of fraudulent tax shelters.

So, again, one has to ask one's self, does it make any sense to worry about the IRS devoting resources to Doug’s crummy little Vietnam trip? Even if—shame on him—he takes his family with him and deducts their costs, too?

Why should the IRS care about Doug when it can get the kind of return they have on KPMG? Or the return they’ll possibly get on KPMG’s clients, who claimed billions of dollars in tax benefits from the fraudulent tax schemes and will all owe the tax back plus interest and penalties? We’re talking about billions of dollars.

What’s the risk to little old Doug of the IRS throwing its resources after him for deducting one lousy trip to Vietnam? Not much? A lot? Somewhere in the middle? And if the IRS does go after Doug, what’s the risk to him that the IRS will prevail? How much will it cost Doug? Does he risk serving jail time? And what about monetary fines or penalties? Is he at risk? What about his reputation? He is, after all, an aspiring author on the possible precipice of great things. Could the publicity help him?

So again, I'm going to leave you with a little more to think about concerning Doug.
Making Expression Less Taxing: A Freelancer's Tax Resource

There are many good questions about the taxation of individuals who want to write to make money. Many things for Doug and all of us like him to think about, to learn, to consider and ponder before we put the costs of a trip or other expenses on a profit-and-loss statement on a Schedule C and attach it to a Form 1040, exposing us to the potential ravages of a dreaded IRS agent or auditor.

And maybe, just maybe, those answers and many, many more important ones like them, both for Doug and for you, are just as important as finding a perfect simile or eliminating an unnecessary gerund, finishing the last chapter of your novel, entering that disquieting contrapposto or portrait in an art contest, or acquiring an agent to sell your work or a gallery to display your sculptures.

What does it mean to carry on the freelancing of expression in a businesslike manner? How does a person maintain a complete and accurate set of books? How important is it to consult advisors and have expertise? How much time and effort does a person need to expend in the actual conduct of freelancing? Does anybody care? Questions. Many pertinent and probing questions for every freelancer of expression.

Now, don’t be naïve like the anxious taxpayer who was visited by a revenue agent. The agent completed her audit and presented a proposal for a lot more taxes. It seems the taxpayer had claimed costs of a vacation trip for her entire family to Hawaii, arguing that she needed to personally experience snorkeling in order to achieve realism in her television drama Nowhere to Be Found. The agent evangelized as he watched the taxpayer’s eyes and mouth widen as he reviewed her proposal for more taxes and penalties. “You know, Ms. Taxpayer, it’s a great privilege to live and work in the USA,” he said. “Citizens have an obligation to pay their fair share. And we really expect you to pay with a smile.”

“Thank God,” said the taxpayer. “I thought you’d want cash.”

There are answers to these questions, pertinent statistics, possibilities, and strategies. And learning about them could be entertaining, too, and relieve some worry and banish much anxiety. There are effective strategies for managing your freelancing business as you express yourself --- making the process literally less taxing.

You can sit back and relax when the IRS calls. You can learn to change the IRS acronym from Internal Revenue Service (or as many taxpayers call it, the Infernal Revenue Service) to: I’m Really Sorry, IRS . . . but I don’t owe those taxes.

I've found that writers who haven't made money yet from their writing activities are often sqeamish in claiming their losses --- the excess of their costs over their income --- against other employment income or self-employment or investment income. I write about this in my tax book for writers, and discuss some tax disputes that have actually gone to court where the IRS was calling the writing activity a hobby, while the writer was claiming it was a business.

In that vein --- although it doesn't involve a writer --- I found the case of John and Esther Chow interesting. You can read it at http://www.ustaxcourt.gov/InOpTodays/.... It's about Esther Chow and her argument that she was a professional gambler. She had gambled for awhile and was claiming gambling losses from her gambling on her income tax return. The IRS said her gambling was a hobby.

Esther Chow won the argument before the Tax Court.

Perhaps you’re saying it’s simple. It can’t be that hard to say whether Doug can go to Vietnam to get pictures of motorcyles for use in a picture book and deduct the costs? If you can’t answer, Walt, you don't know squat.

Okay, that’s fair; I’ll give you an answer.

Yes, he can.

How’s that? Is that what you wanted to hear?

But the answer could also be “no.”

Or “maybe.”

You see, it depends. It’s as simple as that, and as difficult. Federal income taxes are complicated.

If you think otherwise, you are naïve. Don’t be.
The answers involving federal taxation pertaining to “expression activities,” whether your expression is made as a journalist, a painter, a book designer, woodworker, fiction writer, poet, or any other way you may express or intend to express yourself are based upon the premise that all of the facts and circumstances and applicable law have to be considered.

I hear you groaning. Suck it up.

You can't skim the surface. Such would leave you in the lurch if your tax benefits are challenged by the IRS. If you don't consider all the details, it will leave you scratching your head wondering what to do if a revenue agent or auditor alleges that you owe thousands of dollars more in taxes, interest, and perhaps even penalties. Of course, you can dabble in an expression activity, sticking a toe in to see if the water is frigid or not. But if you really want to know you have to take the plunge. So be prepared.

Most people read a mystery for the intrigue, to find out who did it and to figure things out as they go. It certainly doesn’t hurt if the mystery is masterfully written, with an elegance of expression, and is entertaining. In any case, readers don’t want the answers to a mystery all up front or there’s little reason to keep reading.

People enjoy art for similar reasons. The art they afford for themselves is acquired to enjoy its subtleties over the long haul.

If finding out whether your expression activity can be less taxing isn’t mystery enough for you, doesn’t have adequate subtlety, and the knack of the telling isn’t captivating enough for you, please don’t stick with me. You’ll possibly be disappointed if you read on under those circumstances.

Also, if you’re experienced in the business of expression, already making scads of money and are well established and skilled, maybe what I have to say isn’t for you either. (However, maybe you’ll enjoy comparing what you’ve done with what I suggest and pick up some pointers, too.) In any event, if you decide not to read on, maybe you know somebody on the cusp of great things that could benefit from this information.

A lot of hard work is involved in any business of expression. I’m telling you honestly, it’ll require patience and work, maybe both in the extreme to succeed. And if you don’t have the patience for it and aren’t committed to it, you possibly don’t have what it takes to succeed as a craftsman of expression anyway. Maybe it would be a waste of your time.

The novice, new to a sustained expression activity, is reminiscent of the neophyte writer who enters an IRS taxpayer service site to get help with a federal tax question. In the foyer she sees a small sign: “Tax Help.” Above it is a much larger poster with myriads of arrows pointing in every conceivable direction. However, there’s no clue where any of the arrows go. Two other separate arrows on separate signs are clearly marked: “Audits” and “Collections.” Clearly they don’t involve “Tax Help” and also don’t point where anyone wants to go.

You need to know where the crucial arrows go and how best to avoid or prepare for ones clearly labeled pointing toward audits and collections.

Now, a crucial question for you: do you have a business plan for your expression activity? If you want results, you must plan. A plan allows you to look ahead, allocate your wherewithal, concentrate on key points, and prepare for problems and opportunities. Planning is vital for operating a business, whether you’re just starting up, getting a new loan, or making or soliciting a new investment. Plans facilitate optimal growth and development.

If, at this stage, you’re still trying to figure out if you’re a writer, if you’re still just focused on that first novella, a third sculpture, or perhaps only your second book design, then by all means now is possibly not the time to consider all of this. On the other hand, if you begin to see the glimmer of possibilities of succeeding as an artisan of expression and getting significant tax benefits as you start up, then stay tuned.

Some wit coined a term, intaxication, used to describe the stupefaction caused by the Internal Revenue Code (or IRC, as it’s known in the profession—otherwise referred to by some snooty attorneys who look down on it as Title 26 of the United States Code ).

When I last worked every day with the IRC at my side, my version, published in 2004 contained 9,390 pages and there were five volumes of similarly sized Treasury Regulations, which they felt were necessary to explain the IRC. That’s over 54,000 pages alone, none of it what could be described with a straight face as a “good read.” Not only that, but the text in the IRC volume was fifty-fifty size-eight and size-six fonts.

Immediately across the hall from my office resided a vast library of books containing further explications, opinions, and tangential laws related to the IRC, bless its little (and I mean tiny) heart.

A friend told me when she was small and her mom took her to the town library, she dreamed of reading every single book in it. Only the most sick-of-soul person dreams of reading all the volumes in that tax library situated across from my former office. Such would result in inebriant effects: dizziness, nausea, regurgitation, and loss of consciousness. I confess I’ve suffered the effects myself.

Faced with the immensity of the IRC, it’s no wonder that tax consulting and preparation businesses thrive. Most productive people, especially those in business for themselves, rely on CPAs, enrolled agents, public accountants, attorneys, and other professional tax preparation businesses and firms (and some not-so-professional). Everybody knows what H&R Block and J.K. Harris firms do. Many have relied on firms like KPMG, perhaps to their everlasting chagrin.

The U.S. Legislature and the Administration, no matter what party runs the government, promise tax simplification. Without equivocating, they have “simplified” income taxes and related forms beyond understanding . . . especially for those unwilling or unable to spend time and attention—significant time and considerable attention. Where do you fit in relative to this scheme? Let me give some scope to Doug’s quandary—or yours. Our tax system is premised upon a simple notion: income. All income, from whatever source derived, is taxable (IRC §61 ). If you find money hidden in the workings of the old piano you plunked on as a girl when you visited Aunt Betty and that she bequeathed to you, such money is income to you. Not only is the money in the piano income, but so is the value of the piano. And if you trade your knowledge of graphic design to a friend, promising to help with a brochure in exchange for him moving your inherited piano, guess what? You’ve got it. The value of the exchange is income . . . to you and him. It’s the old cliché; they’ve got you coming and going.

“Whoa,” I hear you saying, “that doesn’t sound right. I don’t think my folks paid any tax when they inherited that money from Gramps.”

Well, that’s where “grace” comes into it—not your old girlfriend, Grace, but grace, the disposition to be generous or helpful; goodwill. No matter who’s running the government, they want to be seen as generous and helpful. To be seen that way, but not necessarily to be so, that is. So when there’s a hurricane and consequent flooding, elected officials wander out hoping to be seen as bighearted and taking control. (The judiciary is a little different; they want to be perceived as erudite, fair and just.) In any event, the legislature grants some generosities to be helpful with the tax system and the administration also puts its stamp on them, grudgingly or not. It’s often nothing more than a sophisticated exercise in social engineering. Grace is often granted to the rich and powerful, a special interest group, or to some “special” situation. It all must have some semblance of equity and fairness.