On Friday, October 3, I posted comments on the need for immediate tax reform. I suggested that failure to take action now would lead to a scenario in which efforts to fix the broken tax code would prove to be “too little, too late.” However, after I posted that blog, I remembered that the phrase “Day Late and a Dollar Short” has another, equally troubling implication under our tax code.
Following the addition of a “Replay” official to NFL officiating crews, a new phrase often now heard during a game is “upon further review…” Thus, after further review of my title phrase, I must admonish readers that, as a U.S. taxpayer, you do not want to be either a day late filing your income tax return or a dollar short when paying your taxes. Penalties can be severe.
I have assisted taxpayers in situations where they owe hundreds, even thousands of dollars in taxes. But the penalty and interest owed, if the return was late or the payment short, was often as financially significant as the tax amount.
As a society, we criticize credit card companies for the punitive interest and late payment penalties they charge. Congress has even acted from time to time to limit those practices. But what of our tax code?
For those among my readers who have had the occasion to pay a routine household bill late, it is likely the creditor sent a letter. The letter, at least the first one, probably started something like:
We wanted to remind you that your payment is due on the 10th of each month. As of the date of this letter, we have not received your current payment. If you have already made the payment, we thank you. If you have not yet done so, please remit the amount due at your earliest convenience.
Direct but polite. Firm without attacking or accusing.
It is likely that the letter will continue with language:
If you are having a problem making your payment, please contact us at (800) 999-9999 so we can work with you.
Again, direct but polite.
I don’t know if any among my readers have received a notice from the Internal Revenue Service demanding payment but they tend to be somewhat harsher than the example provided.
Earlier this year, IRS Commissioner John Koskinen issued a statement that acknowledged this problem. While his statement spoke to the specific problem of offshore accounts, his language speaks to the larger problem.
"Our aim is to get people to…pay the tax they owe…a compliance regime that is too harsh won’t net the desired result."
Unfortunately, the GAO has reported that, of the more than 100 million notices issued by the IRS each year, almost half of them contain errors. The Taxpayer Advocate's annual report to Congress regularly places notices high on the list of the most serious problems faced by taxpayers.
And while the error rate is high, many people are so intimidated by IRS notices that they generally conclude it is easier to just pay than to argue the issue, whatever it is. That intimidation arises from the reality that the IRS has virtually unlimited power. It is their ballpark and their ball; it is their rules; indeed, they write the rule book. They are the umpire.
That intimidation is magnified by the language often used in IRS communications. It is sometimes threatening, even if the underlying premise is wrong. When was the last time a taxpayer received a polite, kindly worded letter from the IRS explaining that an error was made and additional tax is owed?
Every year, millions of Americans face the Internal Revenue Service in some kind of adversarial exchange. Although many cases involve simple issues that are quickly and easily resolved, far too many escalate into ongoing financial nightmares. The fact that the last result often stems from an IRS error makes this problem doubly troublesome.
Each year the IRS undertakes the following:
issues over one hundred million notices;
issues over thirty-four million penalties;
executes over four million wage and bank levies;
files about four million tax liens;
Many Americans have undergone some kind of IRS enforcement action or know of somebody who has gone through it . But unlike banks and other creditors, who typically charge 5% of the amount past due, the IRS charges very heavy penalties, up to 25%, and often assess penalties and interest on penalties and interest.
A failure-to-file penalty will apply if you did not file by the tax filing deadline. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline. If you do not pay on time, you will normally face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.
Being a day late filing your return or a dollar short paying your taxes is neither for the faint of heart nor small of purse.
But the problem is not limited to just the return itself. Being a day late filing documents other than the tax return can result in tens of thousands of dollars in unjust tax liability.
When Jane Doe tried to end her marriage in 2004, her husband threatened to kill her. Terrified, she remained in the abusive relationship until a friend helped her flee out of state to live with a family member. After her flight from her husband, Jane contacted an attorney and sued for divorce.
The divorce was finalized in 2010. During the proceedings, she learned that she was liable for more than $60,000 in unpaid federal income taxes resulting from the 1999 Form 1040 filed jointly by her and her then husband.
She immediately applied for relief under the innocent-spouse rule. In her application, Jane stated that her former husband always kept financial documents hidden in a locked safe. She further asserted that he threatened to harm her if she questioned anything he did.
The IRS does not hold a taxpayer responsible for a spouse's unpaid taxes if innocent-spouse status is granted, even if a joint tax return was filed. While this story offers a textbook example of the intent of this provision, the IRS denied her application. They assessed the tax, plus penalty and interest.
The reason for the denial: Jane was a day late. She had failed to apply for relief within two years after receiving the collection notice from the IRS.
Although Jane subsequently appealed the IRS ruling and won, the IRS’ refusal to grant relief ignited a firestorm in Congress, in the Office of the Taxpayer Advocate and among the legal community. Literal interpretation of the IRS ruling is, “You could be physically abused, locked up and not even have access to the records, but if you miss the deadline, too bad.”
The harsh truth is that American taxpayers cannot afford to be a day late or a dollar short. If they are, every sweet cookie in the store will have been bought.
Have to run now. Like the white rabbit, “I'm late! I'm late, for a very important date.”
See you in the funny pages!