How the US Tax Code Kills Entrepreneurship

Tax Code

This article originally appeared on the Tax Revolution Institute website. Join the Tax Revolution here

It’s no secret that dealing with the Internal Revenue Service is complicated. But trying to deal with the IRS while also attempting to make sense of the US tax code is just downright daunting.

Now containing 74,000 pages, the federal tax code has almost tripled in the last 30 years. At the current rate it is growing, it will surpass 100,000 pages by 2050.

But what most Americans don’t realize about the complexity of the US tax code is how it kills entrepreneurship, especially in younger generations.

According to data from a Wall Street Journal analysis, about 3.6 percent of households headed by adults younger than 30 owned stakes in private companies in 2013. In 1989, 10.6 percent of young adults owned stakes in private businesses.

The Wall Street Journal lists a multitude of reasons why young people aren’t becoming young business owners. Those reasons could range from little to no savings after paying back student loans, fear of taking risks, new rules about how they can obtain bank loans, or understanding and complying with federal regulations.

Jessica Juillerat, a recent Purdue University graduate, is interested in starting her own event-planning business. However, she is worried that trying to comply with tax rules and regulations will cost too much.

“The only thing holding me back from starting my own company is really the logistics that are associated with it. I feel like I have the talent, but the cost and paperwork that come with hiring a lawyer to help me is just not feasible right now,” Juillerat said.

Trying to navigate those regulations alone can be time consuming and frustrating, says Emily Mishler, also a Purdue University graduate.

“I spent a lot of time and effort opening a nonprofit LLC, and I don’t think it’s worth attempting to open one for a for-profit company by myself at this point,” Mishler said.

Mishler is hoping to attend graduate school to study business administration. She thinks those courses could help her to better understand how to comply with the IRS and its policies.

“I’m thinking of dissolving my current LLC, but I’m not sure how to go about that or if I would owe the IRS anything, which is scary to think about because I wouldn’t want to inadvertently get in trouble,” she said.

According to the IRS website, small-business owners are required to file a Schedule C with their personal income-tax return that outlines business income and expenses. Because Schedule C’s don’t require small-business owners to submit receipts or other records with their returns, they are subject to a higher level of scrutiny by the IRS. (And it’s much easier for the IRS to validate their own official documents in the form of W2’s or 1099’s.)

So how can this trend be reversed?

It is imperative that we find a way to simplify the tax code so that people of all ages have the opportunity to open and operate a business.

Doing this would especially benefit young people. A simplified tax code would mean money saved on hiring attorneys to help file paperwork, along with saving money on costly advanced-degree programs. (And that’s not to mention that the average two-year MBA costs more than $60,000.) The money that would have been spent on trying to decipher the tax code could be better used in funding new businesses.

Lastly, Americans shouldn’t live in fear of the IRS when the agency itself apparently can’t even enforce some of its own rules. There is no reason why small businesses should be scrutinized more for attempting to comply with IRS regulations.

Don’t Just Depend On A Piece Of Paper

Diploma

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This week, I participated in a panel discussion for new students beginning their college careers at my alma mater, Ball State University. I shared my experiences on campus, talked about leadership, how to find the right job after graduation, and what I am doing now with The Advocates for Self-Government with the Class of 2021 C.L.A.S.S. participants.

During the Q and A portion of the panel, a student asked if earning my degree was more important than the professional experience I gained by completing internships during undergrad.

This is what I told him:

I wouldn’t be where I am professionally without the networking I did as an undergrad. Networking led to internships which led to my professional career. However, the journalism, history, graphic design, and political science classes I took gave me the technical skills I needed to succeed in professional clubs and internships.

In other words, I don’t think that it is important for students to depend on a piece of paper alone. A degree in a subject that one is truly passionate about is great – but it’s not the be-all and end-all of your education.

I have friends that never earned a college degree but have incredibly successful careers. I have other friends that have multiple degrees and are stuck in jobs that make them miserable.

My advice to college students is to take advantage of every single opportunity this upcoming school year and throughout your college career.

Do your best in your classes and ask for help when you need it. If there is a professional club on campus that is relevant to your major, attend a few meetings. If your department is hosting an alumni mixer, GO, and introduce yourself to professionals. Ask for their business cards and keep in touch.

One of my favorite quotes comes from actress Tina Fey:

“Say yes and you’ll figure it out afterwards.”

College is where you’re supposed to take risks, learn, and GROW personally and professionally.

Now, get out there and grow.

IRS Demands You Pay Your Taxes, Hires Contractors Who Don’t

Bloomberg Photo Service ' Best of the Week': The Internal Revenue Service (IRS) headquarters stands in Washington, D.C., U.S., on Wednesday, April 9, 2014. The deadline for filing 2013 U.S. taxes is April 15. Photographer: Andrew Harrer/Bloomberg ** Usable by CT and LA Only **

This article originally appeared on the Tax Revolution Institute website. Join the Tax Revolution here

According to a new report from the Treasury Inspector General for Tax Administration (TIGTA), the IRS does not effectively screen its contractors for failing to pay federal taxes.

Since 2012, the IRS has been prohibited from awarding contracts to corporations with federal tax debts and has been unable to systematically prevent those hirings from happening.

Currently, the IRS is required to examine the tax records of all bidders for contract solicitations of more than $250,000. In a sample of 73 out of 336 contracts from September 2012 to August 2014, TIGTA found “no evidence that the IRS checked the taxes of the other qualified bidders either.”

In order to have an effective vetting process, the IRS needs to require more financial information and other records from the firms it attempts to hire, according to TIGTA. Also, IRS policies do not give contracting officers the ability to communicate the results of background checks to the affected contractors when the results indicate outstanding federal tax debts.

Moreover, tax-record examinations only took place for contracts larger than $250,000. This means that corporations hired for less than $250,000 were never required to be examined.

However, IRS management has agreed with the recommendations TIGTA made in their report. A database is currently being created that will automatically identify a delinquent tax status that officers can use to help them determine whether or not to award contracts. A notice and consent provision has also been drafted to properly advise contractors that tax examinations will take place prior to the hiring process.

But will this be enough?

It is crucial that the IRS has an effective vetting process to make sure that firms that owe back taxes don’t receive more taxpayer money by awarding them with federal contracts. And regardless of how large or small the contract is, all corporations should be examined when they are being paid with taxpayer money. Just like any other agency or business, the IRS should be held accountable for basics, like thorough record-keeping.

What’s more, the IRS must be held to the same standard of accountability that the agency holds the American people. It is imperative that the IRS follows their own self-imposed rules and regulations in order to avoid negligence. This is yet another reason why a true, independent audit of the IRS is so badly needed.

US Olympic Medal Winners Will Owe IRS Thousands after Rio

Rio

This article originally appeared on the Tax Revolution Institute website. Join the Tax Revolution here

As of Wednesday, August 10, Team USA has won 27 medals at the Olympic Games in swimming, gymnastics, shooting, judo, archery, and cycling. China and Japan trail behind with 17 and 14 medals, respectively.

After the pageantry of the 31st Olympics ends in Rio de Janeiro, some US medal winners will return home to a harsh reality. Many of them will owe the Internal Revenue Service thousands because of the cash prizes associated with their medals.

The US Olympic Committee awards gold medal winners $25,000, silver medals $15,000, and bronze medals $10,000. The IRS considers Olympic prize money a source of income for these athletes, as opposed to a gift.

According to Americans for Tax Reform, a gold medalist from Team USA could end up facing a tax bill of $9,900 per gold medal, $5,940 per silver medal, and $3,960 per bronze medal. Although these are the maximum amounts an athlete could pay, it largely depends on their individual tax brackets.

This caused Senator Marco Rubio (R-FL) to introduce the Olympic Tax Elimination Act during the London 2012 Olympics. The objective of the bill was to change the IRS code so that the gross income of US medal winners “shall not include the value of any prize or award won by the taxpayer in athletic competition in the Olympic Games.”

Rubio’s bill never gained any traction, and in 2014, Congressman Blake Farenthold (R-TX) introduced a similar proposal that also never passed.

Unless athletes have a substantial sponsorship, most can’t rely on their sport alone to support them.

In fact, according to a study from the US Track and Field Athletes Association, about 50 percent of athletes who “rank in the top 10 in the USA in their event make less than $15,000 annually from the sport.” This total includes sponsorships, grants, and other prize money.

But the IRS doesn’t just bill Olympic athletes. According to the agency’s website, “cash earned from side jobs, barter exchanges of goods or services, awards, prizes, contest winnings, and gambling proceeds” all must be reported as income by taxpayers.

Our current tax code clearly disincentivizes hard work. Is it right for our Olympic athletes to train for years in a skill and represent our country on a global stage, only to be hit with a giant tax bill when they come home?