Sunday, July 20, 2014
Pay whatever taxes you owe - regardless of what the neighbors think
A reader tells his neighbor that he plans to spend the next couple of weekends painting various rooms in the summer house he owns with his wife.
"You rent out an apartment in your primary house, don't you?" the neighbor asks.
The reader tells him that indeed he does.
"Why don't you write off the expenses of painting the rooms in your summer house as an expense incurred for that rental property?" the neighbor asks.
The reader responds by telling his neighbor that he's not doing any work on the rental property. He's sprucing up only the summer place, so the expenses are not legally deductible.
"I do it all the time," the neighbor says, telling the reader that he owns a house with several apartments that he rents out. Whenever he does work on his primary residence, he tells the reader, he lists the expenses as having been incurred on the rental property -- even though they weren't.
"No one has ever called me on it," the neighbor says. "Why shouldn't I take the deduction? You should, too," he tells the reader.
The reader thinks for a moment how to respond, then simply says he wouldn't feel comfortable taking a deduction for expenses on his rental property that he didn't really incur since this would be illegal.
The neighbor doesn't see the big deal, telling the reader that he already pays enough in taxes. Why shouldn't he take a deduction or two even if he fudges on where the expenses were incurred?
"Because it's illegal," the reader repeats.
"So report me," the neighbor says curtly.
The reader has already indicated he intends to do the right thing by not claiming a deduction for work that's not tax deductible. But he wonders if he has any responsibility to report his neighbor's illegal deductions to tax authorities.
Clearly, the neighbor is in the wrong. How much he already pays in taxes has nothing to do with whether or not he should pay taxes for which he's legally liable. Encouraging the reader to follow suit is bad advice, but not as bad as flaunting his own legal obligations.
"I'm not going to report you," the reader tells his neighbor.
"Go ahead and do it," his neighbor responds. "Maybe you'll get a finder's fee for turning me in."
The reader is still inclined not to report his neighbor, but since the neighbor continues to urge him to do so, he wonders if the right thing would be to turn in the scofflaw. After all, he -- and presumably many others in similar situations -- pay the taxes they owe without creating fake expenses to offset them.
"Why should this guy get away with not paying what he owes when the rest of us have to?" he asks.
The right thing is for the reader to trust his instincts not to report his neighbor based on a passing conversation. Who knows if the neighbor's claim is simply bluster? Without evidence to the contrary, the reader has no proof that his neighbor has done anything wrong.
The reader should pay the taxes he owes and continue to tell his neighbor that he has no intention of cheating on his taxes if the subject should arise again.
Jeffrey L. Seglin, author of The Right Thing: Conscience, Profit and Personal Responsibility in Today's Business and The Good, the Bad, and Your Business: Choosing Right When Ethical Dilemmas Pull You Apart, is a lecturer in public policy and director of the communications programat Harvard's Kennedy School.
Follow him on Twitter: @jseglin
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