Navigating the Income Tax in the 'Offseason'
One of the more aggravating things about our federal individual income tax system is that it has made us all into dreary little tax accountants, and unpaid dreary little tax accountants at that. It’s bad enough that we must put on our green eyeshades during the tax filing season from January to April 15. But it’s particularly irritating to have to monitor our incomes throughout the rest of the year, the “offseason,” lest we run afoul of the law. Two recent news stories highlight the need to be constantly involved with income taxes.
On April 10, the Washington Post ran “Social Security, Treasury target taxpayers for their parents’ decades-old debts.” Marc Fisher related the story of Mary Grice, a black woman, whose federal and state tax refunds had been seized by the federal government for Social Security overpayments to “someone in the Grice family” in 1977:
Across the nation, hundreds of thousands of taxpayers who are expecting refunds this month are instead getting letters like the one Grice got, informing them that because of a debt they never knew about -- often a debt incurred by their parents -- the government has confiscated their check.
After reading the story, it’s not obvious to me what’s stopping Treasury from demanding a payment from every taxpayer whose parents are dead. If the chief witnesses are gone and the feds don’t have to prove that a child actually received any benefits from overpayment, the only “check” on this process is SSA’s willingness to tell the truth about who owes them money and how much. You trust them, don’t you?
On April 15, Thomas Lifson of American Thinker reported that the feds had halted their new practice of seizing refunds for the sins the father, but there “is no guarantee this halt is anything more than temporary.” Thankfully, Ms. Grice, 58, is suing the feds for a violation of due process in “holding her responsible for a $2,996 debt supposedly incurred under her father’s Social Security number.” Grice, her lawyer Robert Vogel, and the Post’s Fisher appeared on The Rock Newman Show on April 17 (the terrific video can also be seen here). Fisher:
Vogel is exercised about the constitutional violations he sees in the retroactive lifting of the 10-year limit on debt collection. “Can the government really bring back to life a case that was long dead?” the lawyer asked. “Can it really be right to seize a child’s money to satisfy a parent’s debt?”
Our second story appeared April 12 in the wood pulp edition of the Kansas City Star in an AP story headlined “Bogus tax refunds a growing problem, reaching $4 billion”:
Thieves have claimed billions of dollars in bogus tax refunds from the IRS by swiping the Social Security numbers and identities of schoolchildren in Florida, prisoners in Pennsylvania, teachers in Washington state and soldiers deployed in Iraq and Afghanistan.
The story, by the AP’s John Seewer, was posted online the previous day (also here), and should be read by taxpayers who depend on refund checks or who overpay the IRS during the tax year. But what caught my attention was a sidebar statistic that wasn’t in the online version. It seems that the average refund this year, as of April 4, was $2,792. That seemed high to me, so I went to the IRS website to confirm it, and the stat seems to be correct.
The takeaway from these stories is that Americans can no longer rely on quickly getting their income tax refunds, if ever. The federal government has seized refunds from honest taxpayers like Ms. Grice while paying out billions of dollars in “refunds” to identity thieves. If your refund is stolen by an identity thief, be prepared to spend a lot of time correcting the situation.
Of course, none of this would be a problem if taxpayers weren’t due a refund when they file their income tax returns. Taxpayers have opened themselves up to these problems by overpaying through their payroll withholding and through their quarterly payments. (To get a better grip on these two issues, refer to Publication 505, “Tax Withholding and Estimated Tax.”)
On April 14, the AP ran a second report that included some interesting stats. As of April 4, refunds amounted to $220 billion, and 79 percent of filers were due a refund. “The IRS expected to receive about 35 million returns in the last week before the deadline. Most come with payments instead of refund requests.” Taxpayers who send in payments with their returns, not “refund requests,” are the smart ones.
Taxpayers overpay because they don’t want to get hit with the Estimated Tax Penalty for underpayment of taxes. But taxpayers aren’t required to overpay their taxes during the offseason. As long as one owes the IRS less than $1,000 on April 15 and has paid the required amounts each quarter, one can avoid the penalty under current law. (One can read about the penalty on page 71 of the 1040 instructions.)
So the taxpayer is caught between the penalty for underpayment and the possibility of having his refund stolen by miscreants, or seized by the government for something his father might have done years ago. And that accounts for the need to constantly monitor one’s income so that one can remit just the right amount of tax during the offseason.
Some workers aren’t required to file a return because they don’t have a tax liability. Nonetheless, their employers may have withheld income tax from their paychecks. If they don’t file a return, they’ll never get that money back. On March 19, the IRS reported:
Refunds totaling almost $760 million may be waiting for an estimated 918,600 taxpayers who did not file a federal income tax return for 2010, the Internal Revenue Service announced today. However, to collect the money, a return for 2010 must be filed with the IRS no later than Tuesday, April 15, 2014.
"The window is quickly closing for people who are owed refunds from 2010 who haven't filed a tax return," said IRS Commissioner John Koskinen. "We encourage students, part-time workers and others who haven't filed for 2010 to look into this before time runs out on April 15."
The IRS estimates that half the potential refunds for 2010 are more than $571.
Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.
With quarterly estimated payments (1040-ES), one can control the amount that one sends in to the IRS. But controlling what your employer takes out and sends in through withholding can be tricky.The amount that is withheld is determined by what one enters on the Form W-4. The W-4 may be the reason why the vast majority of Americans taxpayers overpay. Folks need to study the form and work with their employers to have the right amount taken out, which might be zero.
El Rushbo opined that “somewhere down the road you should not count on a tax refund.” Also, the IRS will soon be policing ObamaCare. It’s been said that the only way the IRS can enforce the penalty for noncompliance with the “mandate” to buy insurance is by seizing one’s refund. I’m not sure that’s true, but to be safe taxpayers who can’t afford health insurance should adjust their withholding so that they won’t have a refund coming.
But everyone should do that; refunds are for dummies. It’s crazy to let anyone, even the government, have free use of one’s money. Everyone with an income tax liability should try to owe the feds a check when they file their returns, not be due a refund. Just be sure you owe less than $1,000.
Jon N. Hall is a programmer/analyst from Kansas City.