I.R.S. AUDITS

The I.R.S. wanted to audit me in my home. They then revised the depreciation schedule on rental property purchased in the 1970's using 1990 property values. This made a mess of my depreciation schedule. Though the method the I.R.S. used was erroneous, the idea of using recent property values which reflect accumulated inflation is a good idea.

Depreciation Adjusted for Inflation

In the IRS tax code most things are adjusted for inflation - generally salaries rise with the inflation rate, generally all income items are adjusted, and even the tax rates are adjusted, but, not all expenses are adjusted. This tends to inflate taxable income, so that the taxpayer is actually paying tax on phantom dollars. This situation arises when the citizen owns assets. The following is one such example:

Any income or expenses denominated in other than current year dollars should be adjusted for inflation. I quote the Tax Law (See Sec. 1(f)), "Adjustments in The Tax Tables so that inflation will not result in tax increases.." I propose that any expenses denominated in other than current year dollars will result in tax increases.

Generally speaking, the tax on the inflationary component of income has already been paid, indexing is already allowed, big companies do it, and it makes sense to index for inflation.

Tax Tables Have a Problem

The Tax Tables (See Sec. 1(f)3), are adjusted for the "Cost of Living" by the Consumer Price Index. The Bureau of Labor Statistics says that "The CPI cannot be used as a measure of total change in living costs..." which means that the Tax Tables are incorrect. In fact, the CPI overstates the cost of living by .5% to 1.5%.

The Fox is in Hen-House

You thought your I.R.S. appeals were impartial? Watch out, the Austin I.R.S. Appeals Office was taken over on 6/20/95 by the Regional Examinations Division (the auditors.)

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