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IRS Cracking Down
on Non-filers
By Tom Herman, Wall Street Journal
If you ignored last week's filing
deadline, you have lots of company. But if you also happen to owe
money, then you may be asking for trouble.
The Internal Revenue Service
faces growing pressure from Congress to do a better job of nabbing
those who should be filing tax returns but haven't. Among
lawmakers leaning hard on the IRS to improve tax collections is
Senate Finance Committee Chairman Max Baucus, a Montana Democrat.
"Those who owe the IRS a tax
return but fail to file are doing more than just breaking the
law," Sen. Baucus says. "They're draining our economy of vital
resources that we need to pay for health care, education and even
tax relief."
President Bush also is calling
for tougher action. In his budget earlier this year, the president
proposed stiffer financial penalties and longer prison sentences
for many offenders who haven't filed and owe money. If enacted,
these changes would be effective for returns required to be filed
on or after Jan. 1 next year.
Under the president's plan, an
individual who willfully fails to file tax returns in any three
years within a five consecutive year period would be subject to a
new criminal penalty if the total tax liability is at least
$50,000, the Treasury Department says. The president's proposal
would classify such a failure as a felony. If convicted, an
individual could face a fine of as much as $250,000, imprisonment
for as much as five years -- or both.
If this proposal becomes law,
"it will raise the stakes considerably for those charged with
failure to file, particularly for professionals, such as lawyers
and accountants, who have their licenses at stake," says Mark
Matthews, a former deputy IRS commissioner who now is a lawyer at
Morgan Lewis & Bockius in Washington.
Sen. Baucus and others are
especially concerned about the subject because the IRS has
estimated the nation's tax gap -- the difference between what's
owed to the government and what's collected -- stands at about
$290 billion, for the 2001 tax year.
The biggest part of the
estimated gap comes from underreporting of tax owed by people who
do file returns, says Eric Toder, former director of the office of
research at the IRS and now a senior fellow at the Urban Institute
in Washington. But the IRS also has estimated that non-filers of
individual income-tax returns cost the Treasury Department about
$25 billion a year, says Bruce Friedland, an IRS spokesman.
Why do so many people fail to
file? One explanation is a severe personal crisis -- such as an
illness or a divorce -- or a financial crisis.
Some people don't file because
they claim there's no law requiring them to pay federal income
tax, or that filing a return somehow is voluntary, or that their
wages somehow aren't taxable. Courts have routinely rejected these
and other arguments. A law enacted last year authorizes the IRS to
impose penalties of as much as $5,000 for "frivolous" returns, up
from $500 previously.
Here are a few suggestions to
consider for those who haven't filed and should have:
Above all, the key lesson for
non-filers is to take action "before the government knocks on their
door," warns Charles Rettig, a lawyer at Hochman, Salkin, Rettig,
Toscher & Perez PC in Beverly Hills, Calif. "The situation is
drastically different once the government is involved."
Also, when you do file, be
sure to come clean. "It would be unwise to file a delinquent
return that is less than accurate," Mr. Rettig says. "That would
only serve to compound a possible misdemeanor failure-to-file
situation into a felony tax-evasion situation."
If you haven't filed and can't
pay what you owe, consider filing anyway and try to arrange some
kind of payment plan.
If you have no hope of ever
paying your tax debts, consider filing an "offer in compromise,"
which means asking the IRS to accept less than you owe. (See
irs.gov for details on
how to apply.)
Sometimes, the IRS agrees to
compromise with people who can demonstrate they genuinely can't
pay what they owe. Getting the IRS to agree to such an offer
typically is extremely difficult and takes a long time. But IRS
officials have said they have taken steps to improve the program.
Curiously, many people who
don't file for years may be eligible for a refund. Naturally,
there's no penalty for failing to file if you're entitled to a
refund. But just don't make the mistake of assuming you have an
unlimited amount of time to file for that refund. If you are due a
refund but didn't file a return, you generally have to file within
three years of the date the return was due, including extensions.
Otherwise, that money becomes the property of the U.S. government.
* * *
TOMORROW is the
tax-filing deadline for many storm victims.
Taxpayers affected by the
major storm that slammed the Northeast early last week have until
the end of tomorrow to file federal returns. The IRS didn't
provide a list of affected states because of "the widespread
nature of the storm and transportation issues that could affect
people located outside the Northeastern corridor."
This applies to calendar-year
2006 federal individual income-tax returns, whether filed
electronically or on paper.
It also applies to requests
for six-month tax-filing extensions, the IRS said.
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IRS Plans to Use Private Firms
To Pursue Taxpayers This Year
By Tom Herman, Wall Street Journal
Tax deadbeats
who owe money to the Internal Revenue Service could be hearing
from private debt-collection firms as soon as September.
IRS officials
say they're resuming work on controversial plans to hire private
firms to help collect large sums of unpaid taxes. The IRS said
this week it received the green light to proceed with the
project's first phase -- in which three firms will begin pursuing
about 40,000 people -- when the Government Accountability Office,
a congressional investigative agency, rejected challenges by
companies not awarded IRS contracts.
But the
program still faces heavy fire in Congress, and its long-term fate
remains unclear. The House voted recently to block funding for the
program in fiscal 2007, which starts on Oct. 1 of this year. The
Senate hasn't yet acted.
Critics fear
private debt-collection firms will trample on taxpayer rights and
resort to questionable methods to collect unpaid taxes. They also
say hiring collectors and paying them a percentage of what they
collect will be far more expensive than relying on regular IRS
workers. The House vote means "We are one giant step closer to
saving hundreds of millions of dollars and safeguarding taxpayers'
personal financial information from the grips of private,
for-profit collection agencies," says Rep. Steve Rothman, a New
Jersey Democrat who led the charge to strip the plan's funding.
IRS officials
have promised to protect taxpayer rights. They say private
collectors won't be allowed to threaten or intimidate. "Using
private collection agencies would bring in extra money and help
reduce the deficit," IRS Commissioner Mark W. Everson said
recently.
While tax
collecting may sound like strictly a governmental function, many
states have hired private firms over the years to help them
collect tax debts, according to the GAO. In the mid-1990s, the IRS
itself tried a small-scale pilot program involving private firms.
But it dropped the program, partly because collections weren't as
high as hoped. Then two years ago, amid growing concern about big
budget deficits, Congress authorized the IRS to hire private
firms.
A group representing
debt collectors says fears about the program are misplaced. The
IRS "is committed to hiring collection professionals who comply
with a strict code of ethics and adhere to" safeguards in the law,
says Rozanne Andersen, general counsel of ACA International, an
association based in Edina, Minn., that represents the credit and
collection industry. Taxpayers "are treated most fairly when
non-taxpayers are encouraged to pay their fair share."
In this first
phase of the project, the IRS is hiring three firms to begin
pursuing about 40,000 people, each of whom owe the government
$25,000 or less, says Nancy Mathis, an IRS spokeswoman. In each
case, the person doesn't dispute owing the money, Ms. Mathis says.
The IRS plans
eventually to hire as many as 10 firms by 2008, when the program
will be fully operational, Ms. Mathis says. Over the course of 10
years, the IRS expects the private firms to help it collect an
additional $1.4 billion in unpaid taxes.
Among the most
vocal critics of the plan is the National Treasury Employees
Union, which represents about 150,000 federal workers.
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