If you recall from an earlier blog, Part 1: The Millionaire Next Door: Swiss? Cheese only, I hypothesized that most people who are guilty of tax evasion are hyper consumers. But not all of these tax cheats use offshore accounts. In fact, I am of the opinion that there is a much greater number of dollars of income unreported within the shores of the United States. As an example, consider a recent article written by Martin Vaughn in The Wall Street Journal (Sept. 1, 2009): IRS To Mine Payment Data on Mortgages. “The Internal Revenue Service will expand a program designed to catch tax cheats that searches for inconsistencies between mortgage payments and income.” In this article, a tax attorney is quoted as saying, “Mortgage interest data might be the best source of information the IRS has on small business owners such as roofers or carpenters who are paid in cash and don’t report all their income to the IRS.”
Reading this comment from the tax attorney jolted my memory. So I went back into my archives and found a study entitled “The Measurement of Selected Income Flows in Informal Markets” dated December 1982. The report was conducted by the survey research center at The University of Michigan. Who was the sponsor? Ah, the Internal Revenue Service. In this study, the value of purchases from informal vendors by types of goods and services is given. What category ranked first in terms of the amount of dollars generated? “Home repair and additions.” This is not to say that all people involved in such industries (those whose members are often paid in cash) fudge on their taxes. But how can we distinguish between those who fudge and those who don’t? In this regard, the wheels of justice have turned slowly but now surely.
In The Wall Street Journal article mentioned above, it was reported that “the Treasury inspector general said. . . that tens of thousands of homeowners who paid more than $20,000 in mortgage interest in 2005 either didn’t file a tax return or reported income that appears insufficient to cover their mortgage interest and basic living expenses.” Imagine living in a home that requires interest on its mortgage of more than $20,000. You can capitalize the $20,000 at the present interest rate and make a pretty good assumption that these people are living in homes valued, at the very least, at $400,000. And if you add a decent down payment the value could be $500,000, $600,000 or more. Could it be that these people are just extraordinarily good at budgeting? Perhaps we should hire them as advisors to help balance the Federal budget!
No doubt some of these people are likely receiving heavy doses economic outpatient care from their parents and/or grandparents. In fact about one-half of the millionaires in the United States report that they help finance the purchase of homes by their children. Yet there is certainly a segment of people who are being studied by the IRS which has unknowingly given itself away. People who live in expensive homes are expected to have high incomes and pay a lot in tax. But what about those whose ratio of home market value [as predicted by the dollar value of interest payments] versus household income goes off the statistical probability chart? If it is not economic outpatient care, loss of job or superlative budgeting and financial planning, you know what it is!
As you will read in my forthcoming book, Stop Acting Rich, there are nearly three times more millionaire households living in homes valued at $300,000 or less than there are living in homes with a market value of $1 million or more. The original title of The Millionaire Next Door perhaps stated it most succinctly: “That’s Why They’re Wealthy.” Conversely, there are some charter members of the Income Statement Affluent who are so driven to display prestige items, such as expensive homes with all that goes along with them, that they not only give up a chance to be financially independent but spend everything that is theirs and Uncle Sam’s! Their insatiable demand for products and services is apparently much stronger than their fear of criminal prosecution for income tax evasion.
Today there are more reasons than ever to pay your taxes and to work with only advisors of the highest integrity and intellect.