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June 2, 2013 / paulio10

Tax Paying Experience in the USA

Have you ever wondered what happens if you don’t pay all your income tax in the United States of America when you’re supposed to? Are you a little bit afraid of that scenario, or perhaps very afraid? Sometimes it can help to hear another person’s actual experience, someone who is going through it right now.

For the first time ever in my life, I was not able to pay our family’s full income taxes for fiscal year 2012 by the deadline of April 15, 2013.  We paid a good chunk of the remaining balance of taxes we owed by that date when we found out how much it was, but we could not pay the whole thing.  This unexpected happening was triggered by doing something new last year – real estate flipping.  We did not set aside part of the income as it came in – instead we bought that one last house to flip, and were not able to sell it or refinance it as the real estate market changed (it’s a long story that I won’t get in to here). All the money that we could have paid the taxes with was tied up in this last house purchase of the year, which extended further into 2013 than we expected.

Being a curious sort about the system we live in, I was kind of interested to see what would happen next.  Our tax advisor said the IRS would add some fees, and send us a bill.  Some time has gone by now, and I just wanted to report that this week we received the first bill from the IRS (that’s about 1.5 months after the due-date of April 15th).

See, you have to realize; every single year there are people who can’t pay their taxes.  Sometimes it just happens. The IRS is used to this.  There are enough “encouragements” in place to avoid having too many people fall in this position, but there’s always some.  For example, you’ll pay a lot more money towards taxes if you pay them late.  But ultimately, the government just wants its income from you.  The IRS is the income-generating department for the entire government.  If you pay your taxes, all is well and good.

What The Bill Says

What does my first bill from the IRS have on it?

First of all it’s really well constructed, as bills go.  It’s a clearly printed 4-page letter and a 1-page flyer about “Your Rights As A Taxpayer”, and a return envelope so you can write them a check and include the payment-stub any time you want. I feel I understand what it’s telling me and what’s expected of me, even though I’ve never seen one of these before.

The bill starts with the total amount due in big letters and numbers, beneath which it states, “Our records show you have unpaid taxes for the tax year ending on December 31, 2012 (Form 1040).”

Then it has a break down on the right:

  • Taxes you owed  $xxxx
  • minus Payments and Credits  $xxxx
  • plus “Failure to pay proper estimated tax penalty”  $xxx
  • plus “Failure to pay penalty” (yes, a separate line!)  $xxx
  • plus interest charges        $xxx
  • equals “Amount due by June 24, 2013”   $xxxx

Below all that it says “Pay immediately – Send us the amount due of $xxxxx.xx by June 24, 2013, to avoid additional penalty and interest charges.”  Another part of the bill says that this calculation is for 2 months’ worth of back taxes.

According to the letter, the first “Failure to pay” amount is a one-time fee because I failed to accurately pay the taxes on time. It was over $100.  The second “failure to pay” line is exactly 1% of the amount I owe; the letter says it’s calculated as 0.5% per month, up to 25% of the total amount due (I’m not sure I understand the meaning of that last part).

The “interest charges” seems to be about 0.4% of the total amount I owe. It was calculated for 49 days, according to later in the letter; it says the interest rate is actually 3%.  However, further in the letter it explains that the interest rate will go up if I don’t pay all this by June 24.

Set Up Monthly Payments

Actually, the letter says to give the IRS a call to set up payments – which I am going to do.  I’m sure I can always pay earlier than the agreed payments.  When things like this happen, it’s important to make contact with the person who controls your destiny – don’t avoid talking to them, don’t hate them. Avoiding them can invoke further charges, since you’re a faceless non-entity that way.  Talk to them.  Explain your position, and your intention of paying in full, as soon as you can. Setting up payments is a good thing for both myself and them.

The same is true when your HOA sends you a “violation” letter because there are weeds growing in your front yard, or you left your trash can at the street a day too long.  It seems stupid, but they do have a point; and they do have some authority over you, and it’s important to be a cooperative part of your neighborhood, with your society. (The ultimate intent of such letters is to maintain the neighborhood’s beauty, which you benefit from!)

Was That a Relief?

Hopefully this helped relieve your mind a little bit, you’re not going to jail immediately upon failing to pay some of your taxes.  The IRS has a system in place to handle it. You will pay a lot of extra money, if you don’t pay on time.  But as long as you continue to pay your back-taxes (and all the fees associated), you will be OK.  Our government gets all the money they would have anyway plus all the interest they missed out on from not having your money earlier, plus a bit of extra money for them to cover the cost of billing, calculating, mailing… with a little extra, just because.  It’s a sweet deal for the one sending out the bills.

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