When you don’t pay your taxes, the IRS is on you like ants to a picnic. I know that because everyday I work with people whose tax problems are exacerbated by strong arm IRS tax collection techniques.
But what about people who overpay their taxes? It might seem hard to believe but the IRS had $1.3 billion sitting owed to 1.4 million people who did not file a tax return for tax year 2006. (You can read more about it at this IRS press release). This outstanding amount owed back to taxpayers happens because someone might pre-pay their tax based on quarterly estimates but then they fail to file a tax return at tax filing time.
The problem is, if you didn’t file your income tax within three years you generally forfeit your right to receive that refund. That means the money will not be leaving the U.S. Treasury, and Congress will be able spend it for its many “important” projects.
It doesn’t seem fair does it. The IRS gets a much longer time period to collect any money you owe them, but you get a much shorter time period to collect money from the the IRS that they owe you.
I guess Congress, who makes up these screwy rules thinks it’s fair, but that because it benefits them.
They fix the rules in their favor.
I came across this interesting study done on the behalf of the IRS Oversight Board. The study asked participants if they felt it was okay to cheat on their taxes. The study itself has been done since 2002 and over the years, the range of people who feel that it is completely unacceptable to cheat on their taxes usually fluctuates between 84% and 86%. In 2009, 84% of respondents said it was unacceptable to cheat on their taxes.
What I find interesting is that in 2003, only 81% said it was unacceptable to cheat on taxes and in 2008, 89% said it was unacceptable to cheat on taxes.
Along with the answer of “completely unacceptable” (the orange bars in the graphic below), somewhere between 6% and 12% believe that it is okay to cheat a little here or there (the light blue bars, below). And 3% to 5% of respondents believe that you should cheat as much as possible.
You can read the rest of the article at the New York Times.
So I went and dug up the number of tax returns filed to see what this meant in real numbers. Let’s use 2008, because we have all the data we need from that year:
In 2008, according to a report by the IRS, 155 million tax returns were filed. So here’s what it meant for 2008 tax returns:
89% of respondents, or 137,950,000 tax returns were completely honest.
6% of respondents, or 9,300,000 tax returns had a few cheats here or there in the return.
3% of respondents, or 4,650,000 tax returns were as dishonest as possible.
Those are interesting numbers. Here’s my take on them: I believe in paying less tax, but I believe in doing so legally. The IRS needs to be more understanding with people who are having difficulty paying their taxes, and they need to offer them real options to help them with their tax debt.
Most people with IRS problems want to want to pay their tax debt, but if money is tight, they need the IRS to be more willing to work out an arrangement. Whether that’s a payment plan or an Offer in Compromise settlement offer.
And just as importantly, the IRS needs to create ways to reduce the number of income tax cheaters (13,950,000 tax returns have some form of dishonest response).
By being so tough on honest people who are having trouble paying their tax debt, instead of going after the cheaters, the IRS is not doing its job as well as it sould.
Last year’s so-called “Great Recession” wreaked havoc on a number of economic fronts and its effects are still being felt today during tax time.
Here’s the situation, as reported by the WCF Courier and summarized here for your convenience: Last year, people had jobs and income but not all of them had sufficient taxes taken out of their paychecks. This year, some of those people don’t have jobs. The problem? They earned taxable income but now have no income to pay their back taxes.
That’s a difficult situation to be in. On the one hand, I understand the desire that these taxpayers had initially to avoid the constant pay-reducing reminder of income tax by delaying their tax payments. On the other hand, it is a bit like gambling in the sense that they are accepting the risk that they will have an income to pay the tax debt at a later time.
What’s the solution? Unless we reduce or eliminate the excessive taxation of American taxpayers, I don’t see an easy solution. And I’m not about to say “well, they should have…” because should-haves don’t solve the problem right now.
Their best option is to file their income tax and pay what they can, even if they can’t pay it all. As the article correctly points out, the penalty for not filing is greater than the penalty for filing and not paying. So it always “pays” to file your tax return, even if you can’t pay.
The next thing they should do immediately after filing? Contact a licensed tax attorney. It is my belief that tax attorneys are the one group of tax professionals best trained to assist you. I believe they’re more aggressive in representing you than a CPA or accountant would be. Tax attorneys aren’t afraid to look at different options which might help you.
Tax attorneys aggressively go to bat for taxpayers who are staring at the open hand of the “tax man” and wondering how they will fill it. We use 100% legal tax resolution strategies, tried and perfected over the years, to help people in difficult tax situations.
No tax case is hopeless, and of course the options will vary from case to case.
Americans face 4 very different kinds of stresses during tax season. I call them the “April 14 stress”, “April 15 stress”, “April 16 stress”, and “April 17 stress”.
April 14 tax stress
In the weeks and months leading up to the April 15 tax deadline, you (and most other Americans) will be facing the stress of tax preparation. There’s the effort of gathering paperwork, pouring through difficult-to-understand tax forms, juggling paper and a calculator, and hoping desperately that you don’t have to pay taxes this year. The stress comes from finding the time to do taxes and then from trying to figure out each separate line in your tax return.
April 15 tax stress
No sooner is that stress over then the next stressor appears: April 15 is tax deadline day. Most Americans just barely squeak their tax returns in on time and the stress of trying to get it done and rushing through those last minute calculations feels rushed. Did you get everything? What if you didn’t do something correctly? You vow to do your taxes earlier next year (but who has the time?)
April 16 tax stress
Fortunately, not everyone feels this stress, but many people do. If you owe tax and you have to pay it, guess what: your bank account may be drained on this day to cover the check you wrote for your taxes. That’s stressful as you watch your tiny nest egg now devoured. Goodbye to that new sofabed you were hoping for.
April 17 tax stress
Have you ever played roulette and hoped desperately that the ball lands on your number? April 17 tax stress is the opposite: It’s audit stress. You hope desperate that you don’t get picked for the probing and invasive procedure known as the tax audit. And realistically, this stress doesn’t go away on April 18; it hangs over us like a cloud every single day.
If you’re facing these stresses, you’ll find some good advice for handling the April 14 and April 17 tax stress in this article at CNN Money called “A guide to avoid an IRS tax audit“. And if you want to avoid the April 16 stress, give our office a call.
Comedian Jerry Seinfeld gives us a glimpse into his own IRS tax audit on this stand-up sketch, which appears at the end of a Seinfeld episode.
He’s right: tax audits are not pleasant. Watch the video for a lighthearted take on tax audits:
While you or I can do nothing to completely remove the chance we won’t someday be audited, there are some basic things we can do to make the process less painful, and less costly.
A basic tip, that many folks ignore, is to keep very good records to document any business expenses or home deductions.
What do I mean by “good” records? I mean that they should be complete and well organized. While this may sound simple, it actually takes real effort. This is a task none of us want to do, but it’s best if we do it anyway.
This is another one of the “joys” of being a taxpayer. Thanks IRS!
A Coverdell Education Savings Account (ESA) is an account created as an incentive to help parents and students save for education expenses.
The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
Here are some things to remember about Distributions from Coverdell Accounts:
Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.
There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Eligible institutions also include any college, university, vocational school or other postsecondary educational institution eligible to participate in a student aid program administered by the Department of Education. Virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions are eligible.
The Hope and lifetime learning credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.
If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.
There are contribution limits for taxpayers based on the contributor’s Modified Adjusted Gross Income. Contributions to a Coverdell ESA may be made until the due date of the contributor’s return, without extensions.
If there is a balance in the Coverdell ESA when the beneficiary reaches age 30, it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member. For more details, see IRS Publication 970, Tax Benefits for Higher Education (at IRS.gov) or call 800-TAX-FORM (800-829-3676).
Remember that for the genuine IRS Web site be sure to use .gov. Don’t be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental Web site is www.irs.gov.
Publication 970, Tax Benefits for Higher Education (PDF 368K)
Fact: Tax revenues are falling due to the economic downturn.
Fact: The bailout/stimulus package will create the largest deficit in U.S. history.
Fact: The bailout/stimulus must be paid for.
In discussing the incoming Obama administration’s planned stimulus package, The Wall Street Journal had this to say:
“Whether or not you think new spending will stimulate the economy, the one undeniable truth is that this money has to come from somewhere, which means that it is borrowed or taxed from the private economy. This spending blowout is all but guaranteeing huge future tax increases, and anyone who thinks only the rich will pay is living an illusion. Taxpayers need some new champions in Washington — and fast.”
Congress will needs its own stimulus package to pay off this huge deficit, so they will almost certainly have to raise taxes. The IRS is not going out of business anytime soon.
In addition, you can enjoy this Wall Street Journal video which discusses the likelihood of tax increases.
By now, email has been around long enough for us to know better when we receive the email that tells us that Bill Gates is going to send us money for every email address we forward to. (That’s SO 1999).
And I don’t know about you, but I’ve seen a drop in the number of emails I get that are written in all caps and start with something like “GREETINGS TO YOU BLESSED ONE” and then goes on to tell me that some highly placed Nigerian politician is trying to get millions of dollars out of the country.
And, of course, there are others that pretend to be something they’re not. I remember seeing one from the “Bankfomaerica” (as if the people at the Bank of American had forgotten to spell their own company name and yet decided to send emails from that domain anyway).
Not surprisingly, we’re not immune to emails claiming to be from the IRS.
In these cases, scammers will use the IRS name and logo to get people to reveal personal information, including their Social Security number, their bank account or credit cards numbers, and other information.
First, you should know that the IRS states explicitly that they do not send unsolicited emails to you about your tax information. In other words, you can probably expect a phone call and/or a knock at the door long before you expect an email. This makes sense, especially since the telephone and face-to-face are far more secure forms of communication, and reputable. (After all, they want to make sure they’re talking to the right person, too). Second, even when the IRS contacts you, they won’t ask for passwords or PIN numbers to bank accounts.
The IRS makes it easy to know whether an email you’ve received claiming to be from the IRS is legitimately…the IRS does NOT send unsolicited e-mail about tax account matters to individual, business, tax-exempt or other taxpayers. Here’s a quote from one of their press releases discussing this:
“The IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.”
Read more about Suspicious e-Mails and Identity Theft on irs.gov
If you do get an email claiming to be from the IRS, you can know for sure that its not from them. Be sure that you don’t reply to it. Delete it or forward it to the IRS. Don’t download anything from the email, don’t click on links in the email… don’t even click on links that say they’re going to the IRS website. The US government will never request any sensitive personal information via e-mail.
If you have received an e-mail claiming to come from the IRS you may forward it to a mailbox the IRS has established to receive such e-mails, phishing@irs.gov, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Following the instructions will help the IRS track the suspicious e-mail to its origins and shut down the scam. You can find the article by visiting IRS.gov and entering the words “suspicious e-mails” into the search box in the upper right corner of the front page. If it really is the Internal Revenue Service, you can be sure that they’ll get in touch with you in other ways.
A classic IRS “best practice” seems to be to give everyone way too much information. At times, their purposes are suspect (do we really need a bazillion forms to do our income taxes?). Other times, their purposes might be noble but their delivery is just plain overwhelming.
Case in point: The article entitled “Tax Return Preparer Fraud”, published at http://www.irs.gov/newsroom/article/0,,id=167391,00.html. The article is actually helpful. Unfortunately, its helpfulness is buried under a pile of other information that doesn’t need to be there.
So, I’ll break out my decoder ring and help you to approach this article and gain the usefulness you need from it.
My first complaint with this article is the title – “Tax Return Preparer Fraud” seems to cover some of the information. The problem is that the article is much, much longer than it needs to be.
Next, we read four paragraphs that describe what tax return preparer fraud is and who is responsible. Not surprisingly, tax return preparers might be subject to criminal charges but the taxpayers are the ones who have to pay if their tax preparers are fraudulent. (While I admit that makes sense, one wonders if there would be fewer fraudulent tax preparers if they were expected to ALSO pay for any shortfall if their actions were deemed criminal).
Then, we read what turns out to be the best part of the article: Helpful hints when choosing a return preparer. Good work, IRS, at keeping your taxpayers informed. But why did you bury this helpful information deep within your site so that only a certified mining engineer could uncover this gold from this quarry of data?
The next section is entitled “Criminal Investigation Statistical Information on Return Preparer Fraud”. Just when we were thinking to ourselves “wow, this is a document from the IRS and it doesn’t contain any numbers”, along comes the statistical chart. In class IRS form, it tells us a lot without telling us anything. In Between 2004 and 2005, there was in increase in investigations initiated. Wow, an increase of nearly 25%! At first we might wonder if people were more criminally inclined in that year. Then we see that, between the 3 years stated, that year also had the lowest number of prosecution recommendations and sentences! I don’t know what that tells you, but it tells me that someone (hint: someone at the IRS!) wanted to LOOK busy because the boss was probably around. Hey, I’m all for honesty and full legal compliance. I’m against what appears to be excessive spending when it’s not necessary. Oh, and I’m also a little disturbed that these criminals get 18 months of electronic monitoring while their victims are likely spending years trying to repay and financially recover from their preparer’s fraud.
Lastly, we have a list of criminal and civil actions that the IRS has taken. Some might call this the “dirty laundry” list… I like to call it the “Look busy! The taxpayers are watching” list. It’s interesting reading, certainly, but not really helpful to taxpayers.
If I were writing this article, what would I do? I would break the content into 2 articles and put the actual helpful information into its own article because people should read it.
Who sings about the taxman? …a bunch of people, as it turns out.
This video uses “the Taxman” song by The Beatles and is clearly created by high school students. But the video is comical and the chase sequences remind me of many British comedies:
Or, if you like the song but prefer something a little more authentic, here’s the 1967 cartoon by The Beatles themselves:
Okay, I realize that those two videos weren’t technically about the IRS. But it does show that the problems we face with the IRS are not unique to the US. Rather, the taxman (and taxwoman) are universal problems.
Here’s a song, titled “The Tax Collector”, that your grandparents probably laughed at. It’s by Flanders and Swann. I can’t make out all of the words (and I’ve searched diligently for the lyrics and can’t find them) but it sounds pretty funny. In my opinion, it’s worth a couple of listens!
This song is a little more specialized. And his heart’s in the right place although I don’t think we’ll see this song on a Billboard chart any time soon.
And this song is about Fair Taxation… not surprisingly, it’s from the Fair Tax rally in South Carolina
