IN RECENT MONTHS, the Internal Revenue Service has been aggressively cracking down on abusive tax shelters. But millions of Americans face a different problem: They don't deduct enough.
New data, based on Internal Revenue Service statistics, show total average itemized deductions of around $25,000 for taxpayers earning between $100,000 and $200,000 a year. That includes about $11,000 in deductions for interest payments and about $3,700 for charity.
For taxpayers raking in $200,000 or more, the average interest deduction was $22,598.
While that may sound like a lot, it isn't. Tax experts say many Americans are routinely failing to take deductions they're entitled to, thus overpaying their taxes by billions of dollars collectively. Chalk it up to ignorance, fear, or both. Many people are so confused by tax laws or so frightened by the threat of an audit that they fail to take perfectly legal write-offs.
The new statistics on deductions were prepared by Jim Seidel of RIA, a New York-based publisher of tax and other business information. The data, based on returns for 2000 (see chart on D2), can help taxpayers determine if they are taking enough deductions. If your deductions are way below average for your income group, you may have neglected to include some important write-offs you are entitled to take.
One common oversight: Some who run a business out of their house don't take a home-office deduction because they fear it is a red flag for the IRS. Others forget to deduct job-search expenses. And one million or more Americans overpay their taxes by taking the "standard" deduction (a flat amount based on your filing status) instead of itemizing, a recent government study found.
For those who omitted a deduction, there's an easy solution: File Form 1040X to amend your return.
If your deductions are way above the average, take a fresh look at your return to make sure it is bulletproof. Even if you have all the evidence to support an IRS challenge, consider attaching a note of explanation for such items as heavy medical expenses or huge charitable contributions, says David A. Lifson, a certified public accountant at Hays & Co. in New York. One red flag is claiming large amounts of charitable contributions compared with your income.
Failing to take adequate deductions is surprisingly widespread. "Many of these people just don't bother to keep the records necessary to establish or document deductions they qualify for," says Joel Slemrod, director of the Office of Tax Policy Research at the University of Michigan Business School in Ann Arbor.
The average total deductions for people who itemized for 2000 was $18,777. That was a 4.5% increase from the year before, says RIA's Mr. Seidel.
Of course, you may have very different circumstances than the average for your group. You may live in an area with high state and local taxes, or you may face unusually large medical bills. Even so, the numbers are worth studying.
Figuring out the maximum legal deduction, however, isn't always easy. Among the trickiest items are valuations of used books, clothing, and furniture donated to charity. One solution is to check prices of comparable items on eBay, the online auction firm (www.ebay.com). Another solution is to buy special software called "Its Deductible" (www.itsdeductible. com), which estimates market value of about 1,000 household items in good, fair and poor condition. The software maker says estimates are based on visits to thrift and consignment shops around the nation. An advantage to using this approach is that you have details to cite in case of an audit.
Just because the IRS may scrutinize a deduction closely doesn't mean it should be avoided. Only about two million returns claim the home-office deduction even though tax advisers say far more people are eligible. The key to this deduction is good record keeping and a mastery of the mind-numbing details in IRS Publication 587. (See www.irs.gov.) For example, you typically have to use the home-office exclusively and regularly as your "principal place of business." That means one of your kids can't use your daytime office as a bedroom.
WHO'S NEWS: Mark Matthews, IRS criminal-investigation chief, will leave soon.
IRS officials will announce shortly that Mr. Matthews will join Deutsche Bank AG in coming weeks in a senior post, where he will be "global co-head of anti-money laundering." Dennis Crawford, IRS deputy chief for criminal investigation, is expected to serve as acting chief. Mr. Matthews joined the IRS in late 1999 and has received high marks from IRS officials and outsiders for leading efforts to overhaul the criminal-investigation unit.
IRS Commissioner Charles O. Rossotti says Mr. Matthews helped put in place the "vast majority" of recommendations by a special commission headed by William Webster, a former federal judge. The unit, he said, also regained its focus on investigating tax-code violations and launched major enforcement actions against foreign and domestic abusive trusts.
NO PAY. Commit to working up to about 300 hours a year, and agree to an FBI background check.
Still interested? The Treasury is searching for U.S. citizens to volunteer for a new "taxpayer advocacy panel" with representatives from every state. Members are supposed to identify key "service" issues affecting taxpayers and "provide critical taxpayer input" on IRS initiatives, the Treasury says.
"Working with taxpayers directly will help us identify issues that may not be on the IRS radar screen," says Nina Olson, IRS National Taxpayer Advocate. "We can also hear their concerns about issues the IRS is already addressing." The application deadline is May 20. For details, visit the Web site (www.improveirs.org) or call 866-602-2223.
To be a member, you must also be "current with all federal tax obligations," the IRS says.
BRIEFS: Notable and Quotable: White House spokesman Ari Fleischer, appearing on NBC-TV's "Tonight Show with Jay Leno," says he grew up a Democrat and was raised a Democrat. "I changed parties basically right after college, mostly because of foreign policy and defense," he says. "And then I started paying taxes -- and I really became a Republican!" . . . Honors: Washington lawyer James P. Holden of Steptoe & Johnson LLP will receive the American Bar Association tax section's distinguished service award at its Washington meeting this weekend.
Want to see how your deductions compare with others in your income group? Here are average deductions for three categories, based on adjusted gross income for the 2000 tax year.
|Income Bracket||$30,000 - $50,000||$50,000 - $100,000||$100-000 - $200,000||$200,000 & up|
|Source: RIA, based on IRS preliminary statistics|
* Total includes medical and other deductions not listed in above table, but doesn't reflect limitation on allowable itemized deductions for people whose income exceeds a specified amount.
Copyright Dow Jones & Company Inc May 9, 2002
By Tom Herman
Wall Street Journal (May 9, 2002)