Tax Deductions and Olympic Deductions

If you’re an Olympic gymnast and you fail to do all of the moves in a compulsory routine, you’re subject to a mandatory deduction. Does the same thing apply to tax deductions?

Those thoughts were going through my head on Tuesday night watching the gold medal-winning U.S. women’s gymnastics team. And it reminded me of Mitt Romney’s comments to ABC News on Sunday when asked if he had ever paid less than a 13.9 percent tax rate, “I'm happy to go back and look, but my view is I’ve paid all the taxes required by law," he said. "From time to time, I’ve been audited, as happens I think to other citizens as well, and the accounting firm which prepares my taxes has done a very thorough and complete job paying taxes as legally due. I don’t pay more than are legally due, and frankly if I had paid more than are legally due, I don’t think I’d be qualified to become President. I’d think people would want me to follow the law and pay only what the Tax Code requires.”

While Romney and his accountants may consider every tax break to be a mandatory deduction, the fact is that they appear to have done some aggressive tax planning to lower his tax bill. His use of offshore bank accounts may be perfectly legal, along with deductions for losses on his wife’s Olympics-competing horse and the use of an IRA worth between $20.7 million and $101.6 million. But it is questionable whether Romney needed to take all the deductions he claimed, and his refusal to release tax returns from before 2010 has been raising a lot of eyebrows.

Senate Majority Leader Harry Reid, D-Nev., told the Huffington Post that a Bain Capital investor informed him that Romney hadn’t paid taxes for 10 years. That may be hard to swallow, and even Reid admitted he couldn’t vouch for whether or not the allegation was true. He also did not provide the name of the investor. But the comment only adds to the mounting pressure on Romney to release his tax returns to disprove the rampant speculation over his murky finances.

The issue of encouraging clients to take aggressive tax deductions is affecting the tax profession as well. The IRS has stepped up its enforcement and is going after tax preparers who inflate deductions. The agency is also planning to set up an online database that will be publicly accessible so clients can know if their tax preparers have properly registered with the agency and passed a competency examination. The IRS long ago made the decision to crack down on tax shelters and forced Big Four accounting firms to pay stiff penalties for marketing lucrative tax shelters to clients.

However, it is really up to Congress to make substantial reforms in the Tax Code, resolving issues such as how carried interest should be taxed for private equity firm partners and why it should be taxed at lower capital gains rates rather than ordinary income rates. Lobbying by the financial industry has helped keep capital gains tax rates low, but shifted more of the tax burden to wage earners. The November election will likely decide what happens with future tax rates and tax reform plans.

Deductions may be mandatory in Olympic competitions when you miss a move on the balance beam or take a few extra steps after you’ve somersaulted over the pommel horse. But it’s really up to the client and their tax preparer when to take tax deductions and how far to take them.

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