Every day I work with people who face tremendous tax problems: They owe taxes and are exploring what options they have to deal with it. It’s something I do every day so I was surprised to read an article that said the IRS is becoming “soft” on tax liens. You can read the article yourself here but I’ll summarize it for you:
The IRS can legally file tax liens any time a taxpayer owes money and has not fully paid it off. There are usually only limited circumstances when the IRS won’t file tax liens, including when the tax debt is for a small amount, or perhaps when the tax liability is for a deceased person who died without any assets, or when the taxpayer is in an active bankruptcy.
In the old days, the IRS would often not file a tax lien, but today, with the federal government needing revenue so badly, IRS collection folks are much more likely to file a tax lien and to to file it faster.
Of course this makes sense for the IRS: If someone owes tax money the IRS wants paid, and filing a tax lien is a a way to put pressure on the taxpayer. A tax lien also helps the IRS protect their position and increasing the odds that they will eventually get paid. Nowadays they try to file the lien as soon as they are legally allowed to do so.
We all know the IRS is a very large bureaucracy, and they make mistakes all the time, so it wasn’t a great surprise that when the IRS recently “audited” themselves that they discovered there were 210 files at two field offices that never had any contact or follow-up and accounted for a potential $6.4 million in collectible taxes. Basically, 210 files were just sitting there, being ignored. In addition to that, tax officers closed over 2,700 files and called them “uncollectable” but never gave a reason. In total, between 2002 and 2008, it was discovered that $1.4 billion in delinquent taxes were shelved rather than followed up on.
Are they getting lazy at the IRS offices? How are IRS officers deciding which files to pursue and which ones to ignore? How can we as taxpayers ever know if we are receiving fair treatment if we are hit with a tax lien while someone else who gets shelved?
The most likely answer is that there are so many “taxpayers” who are delinquent in paying their taxes or in filing their tax returns that the IRS doesn’t have the resources to deal with them all.
The IRS hasn’t gotten soft, in fact they’ve gotten much more aggressive, and busier. If you owe back taxes, you should still sleep with one eye open because the tax man will eventually come looking for you.
About Arnold Schwarzenegger
Arnold Schwarzenegger rose to fame as an Austrian body-builder, then a B-list movie actor, and finally a headlining star. No one goes to see an “Arnie” movie because of his acting ability but we all pay a lot of money to see his movies anyway. As the result of movie earnings, plus other business endeavors, Schwarzenegger’s net worth is measured in the hundreds of millions.
Of course, this story wouldn’t be complete without the step from acting to politics and now Arnold is the governor of California, a state that is teetering on the verge of financial collapse.
Californians can rest assured that their government officials will pay their federal taxes, as long as they are continuously reminded by the IRS.
Arnold Schwarzenegger tax problems
On May 11, 2009, the IRS filed a $79,000 tax lien against Arnold Schwarzenegger. (Source: The Los Angeles Times). While this is more than many people make in a year, Arnold’s people quickly dismissed it as an error and said the governor paid his tax debt right away.
About Conrad Murray
Some celebrities are famous for their skill in acting or singing, but not Conrad Murray. Murray is famous for being the doctor to The King of Pop, Michael Jackson, and is now embattled with legal problems for the alleged role he played in Jackson’s death.
It is said that Conrad Murray has a history of owing people money: According to the Huffington Post, Murray’s medical practice owed thousands of dollars in fines and judgments and overdue fees on loans and credit cards. To top of the “nice guy” image, he also owes thousands in child support and even had a fine of nearly $1,000 for driving with an expired license plate and no proof of insurance.
Conrad Murray tax problem
The Huffington Post also reported that Murray owed back taxes so we went hunting for them and found a tax lien of over $23,000 owing in back taxes in 1993, 1996, and 2003.
The IRS wants taxpayers to pay their outstanding taxes. If those taxes aren’t paid, the IRS has a growing arsenal of actions it can take, from garnishing wages to seizing assets.
That’s right, the IRS can and will seize your assets in lieu of your tax payments. Now, don’t think of them as a giant pawnshop where you can get your favorite chair or your mother’s wedding ring back once you’ve paid. The IRS will put your stuff up for auction! Airplanes, boats, vehicles, homes, property, the list goes on and on. (Check out the IRS Auction Site… if you don’t see something you like today, new items are listed regularly, all “donated” by tax payers who are unable to pay their taxes).
Now, more than ever, people with tax problems need to take an active approach to fighting the IRS to clear up their tax issues and their good name. Leaving your tax problem and hoping it will go away could mean that you’ll get a knock at your door and they’ll be asking for the clothes on your back (figuratively speaking)! Wishing that the IRS won’t come after you isn’t much of a game plan, and it isn’t going to work. If you have tax problems, they’re looking for you so they can look through your stuff like a kid with a catalog at Christmas.
In a recent blog post I highlighted the BusinessWeek article about the IRS asking for businesses to self-identify the areas where the IRS might disagree with them. If this rule change goes through, businesses will need to create a “roadmap” of the line items the IRS should consider auditing. More galling is the fact that businesses will also be required to list the full amount they would owe if the IRS decides against them.
This really frustrates me and I’ve decided to continue blogging about it today. I think this is a disaster just waiting to happen. Here’s why:
It hurts honest people more than dishonest people. This is yet another way for the IRS to go after honest people. After all, if the statistic is true which says that over 16% of Americans evade taxes, those folks are certainly not going to be the ones who will accurately report their numbers. It’s the honest ones who accurately report their numbers who will suffer while tax evaders and tax cheats continue to get away with it.
This heavy-handed “self-audit” program will increase the number of tax cheats. With a confusing and oppressive tax code, it’s not a surprise that cheating on taxes is a temptation for some. With this new rule, even fewer people will feel motivated to tell the truth. Once again, it punishes the honest, or further tempts them to be dishonest.
It’s self-incriminating. Even if someone is filing their income tax honestly, these numbers invite scrutiny which can lead to additional audits. It’s an invitation for oppressive income tax auditors to zero in on a few areas of concern.
As I’ve mentioned before, this assault is focused only on businesses – right now – but if it’s successful (“successful” in the eyes of the IRS, that is), I believe individuals will eventually be forced to perform a similar type of tax filing.
Let’s call it what it is: It’s double tax filing: One is the tax you don’t want to pay but feel is accurate. The other is the higher tax that you don’t want to pay but will have to pay if the IRS decides in their own favor.
And that leads me to another issue: The IRS gets to create these rules and gets to enforce them as well. There are no checks and balances here!
Instead, the IRS should actively pursue tax cheats and tax evaders who are getting away with billions of dollars in unpaid taxes. They should leave honest, hard-working Americans with as much of their hard-earned money as possible.
People are in for a wake-up call: Non-profit organizations (excluding churches) that report less than $25,000 in income in 2010 might discover in 2011 that the donations they received through 2010 were not tax exempt.
Here’s what’s happening: The IRS is requiring non-profit organizations (except for churches) whose reported income is less than $25,000 to fill out an additional form. The due-date for that form was the middle of May but nearly 214,000 non-profits had not filled out the form.
No one will realize their error and they will continue taking donations through the year. Then, when it comes time to issue donation receipts, here’s what will happen:
The organization will discover that it has lost its non-profit status and the generous donations throughout the year will not be tax deductible.
The organization itself will have to report for-profit income, which could be financially devastating to the organization. Meanwhile, the people who have given throughout the year with the full expectation of the tax-deductible benefits of their donation will suddenly discover that they paid money and are receiving no tax deduction in return.
Here is another occasion where the IRS is biting the hand that feeds it. In an attempt to collect every dollar it feels it is owed (and to leave no stone unturned to find more of those “owed” dollars), it will leave in its wake many important organizations that will no longer be able to function, including historical societies, community theater, and community outreach programs. That’s right, the IRS isn’t going after tax cheats, they’re trying to squeeze money from organizations that can barely afford to survive.
Your taxes have been filed. You sit back and relax, and maybe even wait for an overpayment refund. All seems right with the world. But then you get something strange in the mail. A letter from the IRS but you think there must be some mistake: You owe them MORE; or, you get back less than you were expecting.
What should you do? Some might accept it as their unlucky situation, as if their tax return was a slot machine and it came up as three different symbols instead of the 3 lemons you were expecting. I suspect the IRS is banking on this. After all, they are the faceless, bureaucratic giant and you are the lowly person afraid that you’ll open Pandora’s Box of Audits if you say anything.
But you do have options if you don’t like what the IRS is dishing out. The IRS has a system in place for taxpayers to file appeals. It’s with the IRS Appeals office, which is a separate and independent office so you don’t have to deal directly with the people who worked on your return.
When appealing an IRS decision (including your refunds or other things like penalties, interest, trust fund recovery penalties, offers in compromise, liens and levies), you should pull together as much information as you can in order to support your case. And, when appealing, you can represent yourself or have representation from a tax attorney.
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.
If you give a child $1.00 so they can go to the store and buy some candy, what would you think if they came back with $1.52 worth of candy? Obviously there’s a problem. Did someone miscount? Did they steal the additional $0.52 worth of candy? Is the child running a credit tab at the store?
Basic household economics would suggest that we should only spend what we have. And everyone knows that overspending on credit is risky, and if allowed to escalate, will eventually catch up to you.
But the US government is doing exactly this with our income taxes. According to a report which I found in the St. Petersburg times, written by Brian Riedl of the Heritage Foundation, the IRS will collect $18,276 per household (which is shocking enough already) but here’s the worse part: It will spend $31,406 per household (source).
I can’t think of another word for that besides “ghastly”. No one could run their home for very long with that kind of fast-track-to-bankruptcy mentality but the government seems to think it can.
The money is spent like this:
Social security: $9,949
Defense: $6,071
Anti-poverty: $5,466
Unemployment benefits: $1,640
Interest on the federal debt: $1,585
Veterans’ benefits
Federal employee retirement benefits: $1,018
Education: $914
Highways/mass transit: $613
Health research/regulation: $550
Mortgage Credit: $470
Now, just to be clear, I DO think that some of this government spending is important. We need to invest in the defense of our nation, some infrastructure, and some very limited regulation. But I’m concerned about the numerous other spending – overspending, really – that is bankrupting us as a country and as individuals. Does anyone else find it scary that we’re spending that much per household on anti-poverty? And I’m also not happy that we’re spending so much on federal employee retirement benefits.
You don’t need to be an economist, or have an MBA, to figure out that the U.S. government, unless we change our governmental spending habits, is heading for trouble. But the solution will be not be easy.
We must each stop fighting when our slice of the USA money giveaway is challenged. All of us, including corporations, farmers, seniors, and other individuals must all stop protesting when our favorite “benefits” and “entitlements” are being reduced.
We must stop merely pointing at “the other person” as the one who needs to have their “benefits” and “entitlements” reduced or eliminated. We must also be willing to point the finger at ourselves.
All of the groups appear to selfishly want to get as much as they can for themselves from the government, but the long-term way for each of us to better ourselves is to get the government out of the business of taxing us so much and then giving away much more.
Only then will we be economically better off, and be more independent of the stranglehold that Congress’ IRS has over us. I can say I am in favor of giving as little tax as possible to the IRS, but I must be willing to have our government make the hard choices necessary to make that happen.
Imagine that instead of paying your taxes at the end of the year, you paid them all at the beginning: Every dollar you earned went to municipal, state, and federal governments until your taxes were paid off for the year. Then, everything you earned after that was yours to keep. It’s theoretical, of course, but it’s a good measure of the tax burden of a country’s citizens. And you can watch to see how this “Tax Freedom Day” moves in order to determine how your tax burden increases every year.
In 2010, the US Tax Freedom Day is April 9. That means, if every dollar you earned between January 1st and April 8th were paid to the government, every dollar you earned after, until the end of the year, was yours to keep. By comparison, in 1900, the US Tax Freedom Day was January 22. And in 2000, exactly 100 years later, it was May 1st. So although we like seeing that our tax burden has decreased (as indicated by the shift from May 1st to April 9th), it’s still a lot of money to pay.
So April 9th is a day of celebration. But it’s also a day of mourning. We should be concerned about the amount of taxes we pay and about where those tax dollars are being spent. And, we shouldn’t celebrate too much that our Tax Freedom Day has moved closer to the beginning of the year because some of the lighter tax burden is simply the result of short term tax breaks enacted by the current administration to help with economic recovery. And more alarmingly, according to the Tax Foundation, if Americans had to pay for what the government was actually spending this year, Tax Freedom Day would really fall on May 17.
This chart shows the Tax Freedom Day through history and note how the adjustment dramatically increases the Tax Freedom Day!
By comparison, though, Norway and Sweden’s Tax Freedom Day is July 29th. So although I don’t like paying all the taxes we do, I’m proud to be an American.
For more information on Tax Freedom Day for United States taxpayers click here.
Every day I work with people who face tremendous tax problems: They owe taxes and are exploring what options they have to deal with it. It’s something I do every day so I was surprised to read an article that said the IRS is becoming “soft” on tax liens. You can read the article yourself here but I’ll summarize it for you:
