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Thread: Declaring taxes?

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    Default Declaring taxes?

    I am sure most people don't declare all the cash they make for taxes. The problem that arises is this makes it quite difficult to buy a house. First of all, it would almost be impossible to get a mortgage unless someone helps out and even if you had all the cash, this may potentially put you in the unpleasant situation of getting audited by the tax guys. I think purchasing real estate would help a person save money too because there more motivation to save.
    I take precautions like not using credit cards unless I am buying something online because I don't want a record of my spending habits. My question is how do you deal with taxes so you don't have to declare too much income and still be ok on paper to get accepted for mortages while not looking suspicious to the IRS. I have heard of people declaring "losses" for their "business" but I wanted to see if anyone had anything to say about this.

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    Default Re: Declaring taxes?

    if you put 20k down on a house in 2003, make sure you claim at least 30k at the end of the year in 2003. then the irs cant say anything because you are reporting the money.
    Ryan, I think the IRS is a lot smarter than you give them credit for and this is extremely risky behavior and you shouldn't advise people to do this.

    I think the best thing to do is not pretend you're smarter than the IRS (because you're not) and report all your income.

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    Default Re: Declaring taxes?

    Your Right EMILY. The irs is a group of highly intelligent individuals. Maybe everybody should pay a little extra in taxes to be on the safe side ! LOL


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    Default Re: Declaring taxes?

    Well, I won't argue the intelligence factor of human IRS agents. However, one thing that they do have which is indisputable is income and expenditure reporting computer networks which work night and day in conjunction with state title offices (home purchases), state motor vehicle offices (auto purchases), every bank, finance company and financial institution (savings and checking accounts, loans), every investment house (stock and bond purchases and sales, retirement account contributions), every credit card processor (any purchase made using a credit card) etc. In addition, they have arrangements for direct transaction reporting by major retailers (I think WalMart's reporting threshold is $1000 total for money orders purchased at the same time). These sources of info in regard to the money you are spending are available to the IRS at any time. These are all outgrowths of the terrorist anti-money laundering laws, by the way.

    The IRS computers also have "profile data" which can estimate for example how much it costs a typical single person owning a home or renting an apartment in the area covered by your zip code in the way of normal living expenses i.e. rent, food, electric, phone, gas or oil, etc. - they even figure local sales taxes on these expenditures!

    When you file a tax return, it's highly probable that the IRS computers automatically compare the income you reported to the IRS with info the IRS received in regard to your expenditures from state agencies, banks, brokers, credit card companies, retailers etc. The IRS computers will take your reported income, subtract the reported expenditures, and then look at the cost of living "profile" for your area. If your reported income minus your reported expenditures (difference in starting and year end balances on savings accounts, checking accounts, investment accounts, retirement accounts + credit card purchases + car purchases + home/condo purchases + any other reports like money order purchases) does not leave enough of a difference to cover reasonable living costs in your area, AAAAOOOOOGAH ! an Audit will soon follow.

    I agree with Ryan that the best and legal thing to do is report your income according to IRS rules. According to my accountant, this year the IRS has a major crusade underway in regard to unreported tip income, and has already made settlement agreements with Casinos, Restaurant chains etc. to require the employer to report the tips of employees along with their "base pay". Also, the state of California has passed a new law requiring similar dancer income reporting by California clubs, which if nothing else has raised consciousness among tax collecting agencies that dancers are "ripe" for collection of additional taxes. You really do NOT want to find yourself in an audit situation where you have under-reported your income on your tax return and the IRS can prove that fact based on having records that you spent more money than you claimed that you earned! At the very least, this will result in additional penalties for late payment, failure to pay estimated taxes every 3 months throughout the year etc.

    While my accountant definitely does not recommend that anyone do this because it is totally illegal, he does point out that about the only way a dishonest person can escape the IRS computers today is by avoiding ALL sources of transaction reports. This of course would mean never owning a home, never taking out a loan, never making a purchase (including a used car) that exceeds $1000, never making any investments, never opening a retirement account, never having a bank balance which exceeds $1000, never getting a credit card, and never buying money orders that exceeds $1000 in the same day. This also means not building a credit rating, not building social security coverage, not building a job history etc. My accountant jokes that this sort of "smurfing" to avoid financial reporting amounts to outwardly living the life of a welfare recipient, with the exception of having a safe full of cash which you can never spend and which is easily stolen! My accountant also says (and this is NO JOKE) that if for some reason the IRS is tipped off about someone "smurfing", these days it's more likely to be the FBI anti-terrorist squad that follows up the tip instead of the IRS, since "smurfing" is the technique used by many terrorists to try and avoid discovery through financial tracking.

    My accountant advises not to pay any more taxes than you have to (which is the whole purpose of an accountant's job), but to pay the taxes that you're required to by law.

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    Default Re: Declaring taxes?


    This is what I do:

    I pay taxes on money that I put into the bank. So at the end of the year, I just look at my bank statements and that's what I pay taxes on.

    I put money into the bank and then put it directly into investments. This way I am paying taxes on the money.

    When the investments got big enough, I pulled them out and bought a house.

    Tina's method (www.incorporatingyou.com or something like that?) sounds like it would work too...

    Lena



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    Default Re: Declaring taxes?

    Lena, excuse me for being paranoid, but if the IRS sees that the amount of income you reported is exactly equal to the amount of your bank deposits, won't the IRS computers wonder where you're getting the money to buy food, pay your monthly mortgage, utility bills etc ?

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    Default Re: Declaring taxes?

    I estimate what I make a week dancing and have extra withholding taken out of my check at my "straight" job. Then I know it's been put aside and am not tempted to spend it.

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    Default Re: Declaring taxes?

    To buy a house you only need to prove income for two years. I bought my house 3 years ago when 100% of my income came from dancing. It wasn't difficult because I've always filed returns and paid taxes. My taxes state that I make $30-$40k/per dancing (after expenses).

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    Default Re: Declaring taxes?

    no you don't, Sara. You can get a mortgage without showing proof of income, but of course, it gets you a better interest rate if you have it.

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    Default Re: Declaring taxes?


    Melonie,

    I don't know, but it's worked for me so far! I think that the IRS thinks that people use the money they put in the bank to pay bills, buy groceries, etc (most people do, and I do occasionally). I don't have a mortgage because I paid cash for my house.

    About the mortgage... if you have really really good credit, and bank statements showing income, you can get what's called a no doc loan. Do an internet search for "no doc loan" and see what comes up.

    Lena



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