Please Define "Tax Loophole"

Much has been stated and written about “tax loopholes.” In all of these mentions, no one has provided an example of a tax loophole. What is the definition of a tax loophole? Is it income that should be taxed but isn’t? Does it refer to expenses which are deductible but shouldn’t be? Is it a combination of both? Why hasn’t anyone given an example? What is the definition of a “tax loophole”?

As a tax accountant, I can categorically state that there is no such item that is a tax loophole. When General Electric pays zero income tax, the company is following existing tax law. When Warren Buffet pays less tax than his secretary, he is following the current tax code. You may not like or agree with these results, but there is nothing wrong or illegal with these filings. As long as taxpayers comply with the letter of the law, there are, in effect, no tax loopholes. When business and personal clients hire professional tax preparers, we are obligated to perform due diligence to ensure that our clients pay the least amount of tax.

Tax bills are passed by Congress and signed into law by the President. The primary source of tax law is the Internal Revenue Code (Title 26 of the U.S. Code). Various judicial and administrative resources interpret the Internal Revenue Code. Each of these resources carries a different degree of authority. It should be noted that IRS publications and forms are not considered authoritative.

Interpretations of the Internal Revenue Code are divided into 2 main branches; Administrative and Judicial. The Administrative side is comprised of IRS Regulations, Revenue Rulings, Letter Rulings, Announcements and Notices, and more. The Judicial side is comprised of the Tax Court, District Courts, Claim Courts, Appeals Courts and finally the Supreme Court.

Judge Learned Hand stated in the U.S. Court of Appeals case of Gregory v. Helvering in 1934, “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Until our legislators have the political courage to enact major tax reform, we will be forced to retain the current unnecessarily complicated tax code. So the next time anyone talks about “tax loopholes,” please ask for an example?

Leonard Steinberg is president of Steinberg Enterprises LLC, and a member of the Small Business & Entrepreneurship Council. Steinberg also represents SBE Council on FASB’s Small Business Advisory Committee.

Why Does the IRS Care About Your Employees' Cell Phone or Blackberry?

Would the IRS consider taxing an employer-provided cell phone or blackberry as a fringe benefit? If an employee uses it at all for personal contacts each day (for example: calls, emails, texting, or the Internet) that may well be the case. As Congressmen Sam Johnson (R-TX) and Earl Pomeroy (D-ND) pointed out in a recent “Dear Colleague” letter, “the IRS reminded field examiners of the substantiation rules for cell phones as ‘listed property’ under Code Section 280F9(d)(4) when it published the IRS ‘Audit Techniques Guide on Executive Compensation and Fringe Benefits. Employers caught without cell phone logs face added taxes and penalties during audits, so many are maintaining expensive and detailed logs just for tax purposes.”

As Johnson and Pomeroy also pointed out in the letter, this outdated practice started in 1989 before cell phones and communication devices became a part of the daily lives of millions of Americans. The law requires “detailed documentation showing that a cell phone is used for business more than 50 percent of the time for it to be nontaxable to the employee,” according to the Dear Colleague letter.

Today, Johnson and Pomeroy introduced a bill that would repeal the requirement that employers maintain detailed logs of cell phone use. Being that there are 253 million or more wireless consumers (many who get their wireless device from their employer), the bill would certainly reduce the massive paperwork burden on small employers.