Tax Etiquette, Tax Integrity

by | Mar 4, 2012

“There are two systems of taxation in our country:
one for the informed and one for the uninformed.”

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

– Learned Hand, Judge, United States Court of Appeals for the Second Circuit

Taxes. The thought of, the actions to complete, the topic of lively banter in conversation, our past experiences positive or negative — taxes conjure many feelings and emotions for U.S. citizens. American residents are required by law to complete a Form 1040 (Income tax return) every year. For single filers, when income (earned and/or unearned) exceeds $8,500 you begin to pay a tax at the 15% rate. Details of filing status options, tax rates, deductions, exemptions, credits, exclusions, deadlines are easily accessible at your local library and post office. Of course the internet offers a plethora of information as well.  Most people, however, seem to have very little interest in knowing much of anything about income tax law. Most of us want to get our taxes “over with” — as efficiently, cheaply, and effortlessly as possible.  This is a natural response to a complicated system fraught with politics, self-interest, confusion, and dare I say, ignorance – even within the IRS.

I would like to offer an alternative approach, to uplift your relationship and engagement with the tax system and tax preparation. My suggestion is to pay attention to three aspects of tax preparation and management: Organization, Basic Knowledge and Integrity.

Ease of tax preparation can manifest by organizing and following a simple system for collecting, sorting and storing tax data. I will tell you about my system. All year I maintain a tax folder in my hanging file cabinet. In the tax folder are three files: CURRENT YEAR, MEDICAL and DONATIONS. Throughout the year when any tax data comes in relevant to any of these topics, I file in the appropriate folder. Starting in the new year, I create a specific tax folder for the current year’s taxes. Any tax documents (1099’s, W-2’s, K-1’s, etc.) that arrive are immediately placed in this folder. After this data accumulates to a significant size (usually around late February), I obtain a large three ring binder to separate and organize the papers. The tabs are labeled according to the tax return forms. For example: Sched A-Itemized deductions, Sched B-Unearned Income, Sched C-Business, Sched D-Capital Gains, K-1’s, etc.) Each tab is further organized by type. For example: itemized deductions has a page for each – medical expenses, taxes, interest expense, donations, etc.  When the information is organized, tax preparation becomes much easier whether you are preparing your tax return or whether someone else is preparing it for you. What easeful organization system will you create and sustain?

Success for organizing your information is enhanced by your basic knowledge of taxes and tax preparation. Given that you presumably have a tax return in your history, retrieve your most recent return and become familiar with the areas that are relevant to you and your life.  An accessible resource created by the government is:  www.irs.gov/individuals/.   Get curious about the tax forms and the kind of data that is required for each form. As my mother used to say about cooking, if you can read a recipe you can cook. The same situation applies here; if you can read, you can garner basic tax knowledge.  Depending upon your motivation and situation, you might consider hiring a tax preparer from H & R Block (or another entity) to assist you in your preparation and in your acquiring knowledge. Reading money and finance publications are also a beneficial source to gather knowledge.

Lastly, and in my view the most important aspect of tax matters, is integrity. Integrity relates to our own individual practices of adhering to the tax laws, and to an examination of our own beliefs and stories around taxes.

Being accurate and honest in preparing our tax returns is essential to our own well-being and prosperity. I recall a new client many years ago sharing his tax preparation practice. He boasted that he never reported all of his income because there was no way the IRS would ever find out. Perhaps the IRS would never find out, but he knew his transgressions. Being out of integrity creates energetic deceitful debris that lingers until restitution is achieved. We encouraged our new client to shift his view and to report all of his income and allow us to adhere to the tax law skillfully – in the words of Learned Hand – “arrange his affairs that his taxes shall be as low as possible”. Upon completion of his return, indeed the taxes were as low as possible, and even lower than his previous practice.

In addition to following the tax law with honesty, take some time to examine your beliefs and stories about taxes.  Whose views color your perspective?  Your parents, an old high-school teacher, or a pundit from the media?

What if we experienced the practice of paying taxes as a favorable offering for all of the benefits we receive from living in the United States? I’m not stating a belief that the U.S. government system, or life in America, is perfect. My attempt is to offer an opening, to explore your unique situation, and to unravel an area that might be causing you to suffer. In the end, I don’t think anyone really likes to pay taxes. However, it might be helpful to remember that the conditions we enjoy and take for granted are a far-off dream for much of the rest of the world, and there is no other country that offers more opportunities to learn, love, grow and leave a legacy than the United States of America.