Death and Taxes
The first use of the term “Black Friday” appeared in newspapers in September of 1869. It was not describing holiday sales, but rather a financial crisis. Specifically, the crash of the US Gold market on September 24th. Black Friday wasn’t used to describe a holiday shopping spree until 1975 when it appeared in the New York Times. In the almost 50 years since then, Black Friday, has become for many, a bigger event than Thanksgiving itself.
Black Friday is not the only pseudo holiday to bookend thanksgiving. The Wednesday prior to the holiday, has recently garnered the name “Blackout Wednesday”, as in many areas of the country it has become the biggest drinking day of the year. In most studies Blackout Wednesday has now earned its place right in line with New Year’s Eve, St. Patrick’s Day, and Mardi Gras. Alcohol consumption has long been part of holiday celebrations for many around the world.
In 1920 however, the biggest drinking day of the year was not New Year’s Eve, it wasn’t St Patrick’s Day, Mardi Gras, or Blackout Wednesday. The biggest drinking day of the year, by an outstanding margin was January 16th. Technically speaking, it was January 17th. All through the night bars around the United States operated at capacity. Patrons packed the places, guzzling martinis, champagne, beer, and whiskey. When the clock struck midnight, the party took on a whole new level. Bartenders around the country began dispensing drinks of any kind, to anyone who asked…for free. This was not some sort of act of collective generosity, the reason was simple, on January 17th prohibition became law. Contrary to popular belief, prohibition did not outlaw drinking. It outlawed the sale and distribution of alcohol. Since it was no longer legal to sell the booze they had left, bartenders did the next logical thing, and gave it away.
When all was said and done prohibition would last for just under 13 years and would be a colossal failure. The restrictions on alcohol sales did nothing to reduce consumption, they simply gave birth to massive underground networks of rum runners, bootleggers, and gangsters who would rise to power on the enormous profits to be made in the business of quenching America’s thirst for alcohol.
No gangster of the era garnered more notoriety than Alphonse Gabriel Capone. By the young age of 26 Capone had risen through the ranks to become the bods of the “Chicago Outfit”. Due in part to his mutually profitable relationship with Chicago Mayor William Thompson, Capone seemed all but untouchable by law enforcement. In fact he seemed to revel in the public view. He was widely known to make generous donations to charity and became known to many as a modern day Robinhood. He adored the public cheers he would garner when he appeared at ballgames, and was a common figure in Chicago Society.
His reign at the top lasted just seven years before it all came crashing down. He was not arrested for any of the murders he ordered. He wasn’t arrested because of his bootlegging. It wasn’t his prostitution rings, or his gambling operations. The government would have been more than happy to turn the other way and let him continue those business ventures… so long as he paid his taxes on them. Capone was found guilty of five counts of income tax evasion, for misrepresenting his income.
Catching Capone was quite easy for IRS agents. He was a high lever figure, with a large target on his back. Once the Audit was ordered, it didn’t take long for them to uncover all of the deception. A much more difficult task for IRS agents is catching tax dodgers, who are every day Americans. With the help of computers, the task has become much more manageable for the IRS. All tax returns are run through computers that compare them to various statistical categories to look for anomalies. One of the most famous of these anomalies the IRS uses, is known as Bedford’s Law.
Benford’s law is quite simple. In any large data set, about 30% of the entries will have 1 as the first digit, 18% will have 2 as the first digit, and so on. When that is applied to your tax return, the IRS knows that about 30% of the numbers you enter should begin with 1 etc. If your return doesn’t fall within a certain range of expectation, it won’t be immediately assumed that you fudged your numbers, but you will be flagged for further review.
Know this as well, Benford’s law is just the beginning. The IRS has for more data sets they compare you against, and they are smart enough to not publish exactly what they are. To make a long story short, if you want to cheat on your taxes, you will very possibly get away with it once or twice. But if you continue to do it, you will almost certainly get caught. So don’t try.
You shouldn’t cheat on your tax return because it’s illegal. You also shouldn’t cheat on your tax return because you don’t need to. An active tax planning strategy, in most cases will end up saving you more in taxes than you would have dared risk trying to save by cheating. The best part, is that tax planning, is 100% legal. You don’t need to overstate your donations to charity, you just need to time them better. You don’t need to lie about IRA distributions, you just need to convert them. You don’t need to misrepresent capital gains, you just need to manage the gains to work in your favor.
It has been said that there are two certainties in life. Death, and taxes. You can’t do anything to change that. But you can do many things that will change how much of your money ends up going back to the government. Learn the rules. Or, hire someone who knows them, and use every but of the tax code to your advantage. It can save you hundreds of thousands of dollars.