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The Bailout Plan and Your Income Tax - PART I
Although no one has a crystal ball to see where we will be financially in 4 years, the new Bailout Plan does have important short term personal income tax provisions which you need to be aware of in order to take advantage of them. However, the economic crisis will have adverse federal and state tax ramifications for many middle income Americans, especially those residing in states like New York and others with substantial budget deficits. Also, the future of America’s state of economic condition will be significantly impacted by who is elected President in November and who controls Congress over the next four years, and will directly affect how much income tax we will be paying over the long term.
Lack of Government Fiscal Accountability
Despite the emerging signs of adverse strategic economic indicators over the past decade, government officials (federal and local) have progressively ignored these indicators and spent taxpayer money irresponsibly leaving in unprecedented debt with increasing local property and sales taxes. The combined consequences of a deregulated financial industry irresponsible government spending has left middle America and our government economy virtually insolvent with no one willing to accept responsibility. Yet this debt must be paid, and the tax man cometh.
One key point to remember is that it took years to get to where we are today and it will take years to dig our way out. Unlike previous economic recessions which we have experienced during the past 4 decades, this time the consequences will be much more dramatic.
Increased Tax Audits and Tax Enforcement
As federal and local deficits increase, more pressure is put on the revenue agencies to collect taxes. As a result, during the past year or so there has been a 25% increase in the number of federal tax audits of small business corporations and partnerships, as well as sole proprietorships by self employed persons and other individual taxpayers as well. The IRS and state revenue departments figured it was more economical to shift field auditors from auditing large corporations (where they could spend months and sometimes years) and instead audit small businesses and self employed individuals who did not have a staff of full time accountants and tax executives and where it was more likely that they would find less accurate record keeping and less likelihood that they would have the resources of a tax professional who was both well versed in tax law combined with experience dealing with field agents and business tax audits.
Both the IRS and many revenue departments have replaced internal tax collection enforcement personnel with professional bill collectors. Additionally, with the new computer programs that examine tax returns filed electronically, comparing the information reported on the tax return to information received from third party sources (like employers, banks, etc.), if something does not match perfectly, it is possible that the computer will generate a tax deficiency notice to the taxpayer instead of the old “30 day” letter. If the taxpayer does not respond in time, the tax deficiency is turned over for collection. Often the “debt “ is turned over to a bill collection agency who hounds the taxpayer until either the bill is paid or a lien is filed and it is turned over to an attorney for collection.
Sometimes a lien is filed with notices to banks ordering them to freeze accounts that show the taxpayer’s social security number and then to pay the lien from funds in the account causing the taxpayer to lose control of the situation and also have their credit rating tarnished. Many taxpayers who prepare their own tax returns or have it prepared by services that are only open during the tax season often have no idea what the notice pertains to and they end up paying the bill, even if it is incorrect.
So as our economy turns south with dim prospects for the future, many small businesses and individual taxpayers have been and will continue to face not only the prospect of dealing with ruthless debt collectors, but also paying tax bills that are incorrect along with steep penalties, interest and possible collection fees.
Despite what you hear on TV ads, the solution to dealing with these problems is not found “in the box” of the tax preparation software that you may have purchased to do your own tax return, and is why now, more than ever, it is strongly advised that you retain the services of a tax professional who is not only experienced and knowledgeable, but who is available to help you all year round.
The existing banking crisis-what went wrong?
In the big picture, it was necessary for both houses of Congress to agree on certain short term economic solutions and tax enhancers that could help maintain and temporarily improve our national (and global) economy; however, the big question is who will pay the price in the long term. Because our representatives and elected officials seem to suffer from economic myopia, missing the forest for the trees that stand before them in the moment, much of our national and local government fiscal policy fails to forecast the long term effect of short term decisions and legislation. A case in point, those who began their careers during the 1970s experienced dramatic fluctuating changes in government economic policy and fiscal legislation during the past 30 years which may have gradually contributed toward our existing economic crisis. We witnessed a time when only those who had established credit worthiness were given personal and mortgage loans as well as credit cards when suddenly banks were mailing out credit cards to graduating students and finally to the general public who never even applied for them. Banks lowered their credit rating criteria enabling persons who were already in debt to dig an even deeper financial hole. Where once there strictly enforced usury laws which limited the amount of interest charged on credit card debt, by the end of the 1970s these laws were changed in a way that permitted banks to charge rates between 25% and 30%. Heck, at one time even loan sharks had a limit on the amount of interest they would charge, but since 1978 credit card companies were putting loan sharks out of business. A dramatic 1978 Supreme Court decision began deregulation of the banking industry and a meltdown of our banking system which. The real nail in the coffin was the 1999 Gramm-Leach-Bliley Act which repealed the remaining 1930’s protective consumer banking legislation.
Government Knee Jerk Reactions: Since that time we saw a dramatic increase in the number of financially distressed families with a correlating increase in the number of personal bankruptcy filings which led to the recent “knee jerk” changes to the federal Chapter 7 bankruptcy laws which were intended to provide relief for once fiscally responsible people who found themselves in need of a fresh start. But by then it was too little, too late as America experienced one of its worst economic recessions in decades during the 1970s, leading to double digit inflation, an artificially stimulated economy in the midst of which we witnessed the economic crash of October 1987 followed by another recession and then a series of economic “bubbles” that finally burst at the turn of the millennium with what we were told was an economic “correction”. Although I firmly support the concept of a free market society, if nothing else, a certain degree of government regulation (which followed the Great Depression) did at least keep society from going through what I call “ka-ching mania”, where society (government and citizens alike) kept spending money they did not have and mortgaging our children’s future.
The Reasons are Simple: One does not need to be a rocket scientist to understand the reasons for the changes which have transpired over the past 30+ years which journeyed us to where we are today. The answer is greed and irresponsible fiscal policy. In order to stimulate the economy during recessionary periods, people needed to spend more money and big business needed to expand markets and grow bigger. Banks needed higher interest rates in order to supplement losses, and while interest rates on loans decreased, credit cards were literally given away at usurious interest rates and when that wasn’t enough, where once there was a grace period for payments in transit, banks were permitted to charge late charges of up to $39 for payments received or credited to the customer’s account by one day. Small, family owned businesses, which even today account for up to 60% of our national employment, were put out of business by retail chains, many of which closed down after putting the little guy out of business furthering unemployment and shortfalls in sales tax revenues (which local government officials had factored into their budgets, thus causing municipal fiscal deficits). The saga goes on and on but the solution is summed up in the saying “If it is to be, it’s up to me”. If America is going to survive the 21st century, it is “we the people” who must take responsibility for increasing our knowledge and understanding of “how money works” and instead of following the crowd like lemmings jumping off a cliff, we need to interact with both our local and national elected representatives to ensure that their actions are our best interests, not those of their lobbyists and large financial supporters. If a democratic society is going to work, it is our responsibility to get involved and become committed to making it work. Let us not forget that it was a crippled economy and loss of national dignity that led to societies of great nations to allow people like Adolph Hitler and the National Socialist German Workers Party (a/k/a NAZI) to assume power and control over their lives leading to one of that nation’s and the world’s most brutal times in global history.
So my fellow Americans, change is the only thing that is constant, and change is a good thing, provided it is initiated by “we, the people” and not someone promising empty promises which may well be a hidden agenda of others and all we see are smoke and mirrors of illusion.
END of PART I Click here to Read Part II
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