6 ways to keep the IRS at bay

By Jeff Schnepper

They're coming to get you . . . ha, ha!

After years of ignoring the ability of the rich to get around the tax code, the IRS has been cracking down on abuses by the wealthy.

One of the reasons for making a move on the wealthy is that the abuses have been so flagrant that even Congress was offended. Plus, the federal deficit is swelling quickly, and the government needs the cash.

One way to get it is to make sure everyone pays his or her fair share -- including the rich, who can afford to pay high-priced tax attorneys to find the cracks in the tax code. These tax experts design investments for their clients and structure their financial situation so that much of their income is sheltered from tax.

They do a great job.

For tax year 2002, 5,650 returns with incomes of $200,000 or more showed no income tax liability. That was up from 4,910 returns in the prior year. Plus there are a lot people making a lot more money. The Washington Post reported that the number of people who report more than $1 million a year in adjusted gross income has more than tripled in recent years -- to 239,258 in 2001 from 66,485 in 1993. (It fell back to 169,000 in 2002.) Worse, cheating by corporations and individuals is worse than was once thought.

So, what are the consequences to you of this shift in priorities? If it's legal, a move that reduces taxable income is called tax avoidance, and everyone just calls it a "loophole." But, if it's not legal, that's tax evasion and could land you in jail.

Unless you look really good in stripes, here are six suggestions about what to be aware of, and what to run from:

Reduce your exposure

"The fact is," former IRS Commissioner Charles O. Rossotti once said, "people who make more than $100,000 pay more than 60% of the taxes, and we need to focus there."

If you're making more than $100,000 a year, your risk and probability of an audit has increased. That means that it's even more important now to keep adequate records to substantiate your deductions.

It also reinforces the benefits of income allocation. That's where you view your family as a single economic unit, obviating the issue of who actually generated the income. You can then, within the law, allocate income from a higher bracketed family member to a lower bracketed one, and save the difference in tax dollars.

Continued: Be aware of 'kiddie-tax' rules

 1 | 2 | next >