No one pays penalties for simple mistakes. That's what FOX news tells you, but it's not true. We've made five-figure goofs on taxes in the past and a simple letter explaining the mistake (assuming it's an explainable mistake and you didn't get caught in actual attempted fraud) is enough to get the penalty waved.
Seconded. Mine was a 6 figure mistake. I fact, it COST the IRS money to contact me.
Once they sent info I realized the error, and that I did not in fact owe 6 figures. Paid it anyway so my wife wouldn't stress about penalities, restated ( took a year) and then received a refund with hefty interest paid by the IRS. Along the way their support line was helpful in getting some questions answered.
At the risk of seeming flippant, but if you can afford to pay a six figure mistake just "so my wife wouldn't stress", then she probably really didn't have too much to stress about, financial burden of penalties or otherwise.
My wife has several degrees in finance, and that is her field. So I am lucky that our finances are somewhat more well managed than a lot of other folks. Her "home budget" spreadsheet spans more tabs than many small business' budgets.
With that in mind, we keep a certain amount of "operating expensed" liquid, since we both tend to work in smaller companies than can go sour rather fast. Paying out that check to the IRS sucked up the majority of those liquid funds. If you've read some of my posts in the past (not that I'd expect you to have done so...), you'd see that I'm on the upper end of the age scale here, have been around a while, and managed to enjoy a run through the dot-com 90's. So, I do not have the finances of a single 20-something college graduate.
I looked at this IRS payment as an investment. I was very highly confident that I would get my money back (and then some), so that was the easiest path, all things considered. Had I been more in doubt I would have certainly kept the money, reasoning that I'd rather have them pry it away from me if it came to that.
I didn't mean for my comment to sound like I just go around writing 6 figure checks as the path of least resistance.
That's like saying you shouldn't get stressed about receiving a parking ticket as long as you have the money to pay the ticket. Or you shouldn't get stressed if you get dinged with a penalty for not using an airline ticket or (pick your example). The truth is people do get stressed regardless of what their financial situation is. (Add: Logically they shouldn't but they do.)
More to the point the thing that causes stress is the fear of the unknown. The fear of "what if" where you don't know the outcome. One of the ways I have found to at least reduce a bit that stress is to come to the acceptance that the outcome even worse case scenario can be dealt with or how it will be dealt with which seems to work for me as a mind game.
Add: Also the parent's wife may have a different financial upbringing and might have a case of ptsd because of family history or other factors.
I don't know. Not paying what appears to be a 6-figure tax bill would be pretty stressful considering the amount of taxes the IRS would think you were evading.
This is my experience as well, and the experience of everyone I know. At least for us, the IRS is not out to give us the run-around.
Besides, if you think about it, even if you figure the IRS is greedy and only motivated by money, the biggest returns for them are catching fraudulent millionaires dodging tens or hundreds of thousands, rather than slapping you with a $100 fine over a $2.38 mistake.
Another profitable tactic would be to find the sweet spot of people who make enough money that they can be accused of large tax errors, but not make so much money that they can afford to fight it all the way out in court.
Like I said, it was an error on our part. I don't disagree that at all. I have absolutely no qualms in paying what I owed. But I wouldn't have paid a dollar over the amount owed if they had adequate systems in place to catch my typos and immediately notified me to fix it. But a lack of proper processes on their part meant it took them 2+ years to find an error and now I owe them taxes + interest. Whether I would've made or lost money if I had invested in mutual funds, stock market, or horse races is not the question. The problem is by making a mistake, I am now at their mercy for an unspecified length of time.
Also the error could not have been avoided by us. My wife was in school and we took the American Opportunity Tax Credit since it was higher than Lifetime Learning Credit. But turns out my wife's estranged stepdad had years ago, unbeknownst to my wife, taken Hope Credit for her by claiming her as a dependent. Long story short, we owed some taxes + interest after filing a correction.
This is where I simply don't understand the thought process. You got burned and had to write a check, and you're angry. And yes, a more efficient and effective tax regime (which is what the linked article is about!) would have caught that faster and you would have been less angry. But that's where this has to stop -- your rationalizations just don't hold water.
I mean, really: how is paying 4% APR on a loan[1] you got from the government "at their mercy?". It's not even a bad rate for an unsecured loan! People routinely pay much higher for car loans, and even now mortgages (which are at historic lows) are only a little better.
[1] Which is what this is. You walked around with extra money in the bank for three years, albeit accidentally. Why doesn't that fact figure in your analysis?
(FWIW: if the stepdad was really "estranged" and still claiming your wife as a dependent, then you should have been able to fight that. That's not how tax law works. My guess is that they weren't actually "estranged" three years ago, and she probably did meet the definition of a dependent. Again, that's your mistake if so.)
> I mean, really: how is paying 4% APR on a loan[1] you got from the government "at their mercy?". It's not even a bad rate for an unsecured loan! People routinely pay much higher for car loans, and even now mortgages (which are at historic lows) are only a little better.
Because I didn't want the loan. What's not to understand. I wouldn't have had a problem paying the full amount if they had told me sooner. Also it was over 6% because it was 2+ years and not 3.
> My guess is that they weren't actually "estranged" three years ago, and she probably did meet the definition of a dependent.
I'm certain it met the definition but not the spirit. It wasn't worth having us fight or prolong this. As it is it took 8 months, four registered letters, 20+ hours on the phone, and numerous meetings with my tax attorney to get this resolved. IRS didn't just say "Cannot qualify for Hope Credit because lifetime limit was reached." They outright denied it and asked for the full amount with interest immediately. If this was a business deduction like restaurant bill, we would've paid it immediately. But denying education credit without any reason why? We had no idea her 4 years credit was already used. We had to contact her school, Sallie Mae, review all of our past records etc. and finally our accountant suggested that maybe when she was younger, someone claimed her.
This 2 year $500 'unsecured loan' at a wonderful interest rate cost me easily over $3k and delayed my citizenship process by 8+ months. Did you know if IRS has an open claim against you, you cannot file for citizenship even if you're married to a citizen, lived in US for 13 years and have a green card? I'm not angry. I'm just saying their systems and processes leave much to be desired.
Because I didn't want the loan. What's not to understand. I wouldn't have had a problem paying the full amount if they had told me sooner. Also it was over 6% because it was 2+ years and not 3.
You had the use of the money in the meantime, which has a value. As for the delay in your citizenship, IRS does not make that rule, it's written into the immigration law.
The facts keep changing here. How does a 12% interest accumulation on a $500 loan come out to $3000? Or maybe the $500 was the interest, in which case your "loan" amount was $4167 (which, I'll just say again, is hardly an insignificant fact -- lots of people would love to get a $4k loan at 4% with a 3-year baloon payment!). And I don't see why you ended up paying the remaining $2500k to a lawyer when even you admit the tax liability was correct (and in any case why would you pay >50% of the amount being contested on the lawyer anyway? That's just not worth it.)
The one item that strikes me is the bit about the citizenship. And I can clearly see how that would be a huge disruption. But frankly I'd blame an unjust INS policy here. I don't see how you're pinning this on the IRS for correctly (if inefficiently) enforcing its tax code.
Interest was just $65-$70 or so on the $500 'loan'. $3k was in accountant, tax attorney, paperwork fees. We also had to pay her school to send notarized transcripts to IRS because they wanted proof that she even went to school. And since the IRS letter arrived just 2 days before their deadline, we had to pay extra to the school to get it delivered overnight. Most annoying part is that Sallie Mae was the one that gave out the loan directly to her school.
I'm not saying the citizenship was IRS fault. I said a $500 'loan' that I never asked for, had no intention of 'stealing', had no way to know was pending, ended up causing months of paperwork, hassles, and undue stress. It is appalling that people expect me to treat this like a wonderful tax refund instead of what it was - absolute waste of productive time.
All of this could've been avoided by a single rule in IRS tax processing system that auto-sends a letter or email saying 'Our records show X yrs of Y lifetime credit have already been claimed. Please refile.' And I'm certain that I'm not the only person who had to go through a similar thing.
I can see where you're coming from but given some of the content of the original story it's not entirely irrelevant.
I actually do wonder a little what Grover Norquist's deal is here. I understand his politics (sort of) but I assume receiving a statement laying out the calculations the government is going to use against you could only be an advantage when strategizing how to reduce one's tax bill. That he'd be against it is odd.
Maybe he really wants the whole process to be as inconvenient as possible so people will sign on to some of his other ideas.
What I've seen listening to Grover Norquist is that you can't take his positions at face value. Example: Before the 2012 election he said they'd primary Republicans who broke the pledge. After the election he started supporting compromises. I don't think you can rely on a straightforward statement of these people's principles.
Well, I couldn't really make a straightforward evaluation of Norquist's principles even if I were ready to extend that kind of trust to him. The guy is on the record as believing that the government's imposition of income taxes is equivalent to the Holocaust.
With him, it's always a question of whether he's crazy in the obvious way or in a more subtle way.
Ten bucks says his organization, Americans for Tax Reform, gets money from Intuit, HR Block, or another similar company. Of course, we'll never know because 501(c)(4)s aren't required to disclose their backers.
How does it help vendors of tax preparation software and services if Norquist and his group succeed in getting taxes reformed, simplified, and lowered?
I think the reason Norquist opposes measures to make the existing tax system easier to live with is that such measures would tend to reduce pressure to implement his proposals to change it. He doesn't care one way or the other about Intuit, H&R Block, or your friendly enrolled CPA, the demand for all of whom would be reduced if he were to succeed in getting his proposals enacted.
As for myself, I happen to believe tax withholding was not one of Milton Friedman's finer inventions[1]. You should get your full paycheck every payday. Then, every quarter, you should have the privilege of cutting a check to the United States Treasury. That would keep taxes on everybody's mind!
Interestingly - my experience, on innocent mistakes, has been varied.
I got hammered owing 6 or 8 hundred dollars for a $200 mistake when I was 10 years old and making money off of my paper route. (No, my parents didn't cover the bill nor do my taxes.)
And I made $10,000 mistake five years ago and they said "Oh - whoops, pay your bill and be more careful next time" and then called it a day.
That is a reasonable conclusion to draw. But not the one I draw.
However there were 20 years between the 2 events.
And the first was found because of an audit, while the second I found and reported within a few months of filing.
There’s a lot going on here. The lesson I draw is: different circumstances different results. But both good and bad results are possible, for fairly similar inputs into the process.
That they did. I assume it’s for the reason that maxerickson stated. These where some /really/ simple taxes.
Other than the huge (for me) fine, it was a fairly painless experience. My parents did handle it - but even for them other than the stress of knowing it was happening, I think it involved not too much work for them, and as far as they where concerned had not too bad an outcome.
I do suspect my parents double-checked my filings from then on a lot more closely than they had before.
I've paid penalties for an IRS mistake. I submitted my returns, and the IRS said "We found a mistake, here's $300 more than what you thought we were going to refund you!".
A few months later I got another message from the IRS. "You made a mistake and got $300 too much! Pay us back + interest."
Didn't feel like fighting it because I heard that can go south easily, especially for such a tiny amount, so I paid it back with the interest.
Yup, 100%. I did the same, it was a big botch that I then took 6 months to finally get around to addressing. The IRS sent a few simple letters, and in the end there were no penalties-- I think I paid some ridiculously low interest on the money I owed and payed past the grace period they gave me from when I found out about it.
The penalty is in interest on the taxes. We had an incorrect entry in our 2010 return and had to pay about 12% in addition to the deficient amount. That would've been zero if they just verified it in 2011 and told us that there was an error. That is a penalty as far as I am concerned because I didn't get to choose the rate, I didn't get to fight it, and I didn't get to decide when it was due. It was an error on our part and a lack of efficient process on their part caused us to pay extra fees on top of the back-taxes. Whether you call it justified interest or penalty doesn't matter because it still costs me the same.
No. The current IRS interest rate for unpaid tax is 4%. You apparently paid almost three years late, which is getting pretty far afield from "explainable mistake" or "charge you a giant penalty for !=". Hell, if you had "cheated" and put that money in a mutual fund you'd have made a profit.
Well that's the thing, the IRS can wait 3 years (or 6 if the error was bad enough), then look at your taxes, and pound you with 4%/year, instead of setting up a job to look at everything right away.
Is that what happened in this case? Again, this is turning into an anti-government diatribe. The original assertion was that the IRS would apply heavy penalties for getting math wrong on the return. No, that's incorrect. Then it was that they'll assess a 12% penalty. No, that's wrong too, it's just a 4% APR.
Now your claim is that they're... what, lying in wait? Deliberately maximizing penalties? That's not my experience (our mistake was caught after about 5 months I think). You have a counterexample?
(Edit: and reading the replies, the discussion has now slipped yet further afield from the original assertion, and in two directions: on one hand, it's now outrageous -- yet somehow still an argument against the reforms in the linked article -- that some people merely have "bad experiences" with the IRS. On the other the IRS are apparently now highway bandits literally robbing people with threat of force. I give up.)
Since you had a good experience then we are to suppose that everyone has a good experience? I believe there are a good number of stories to show that people have had rather bad experiences with the IRS. Just like you, I'm sure there are stories of people having a good experience with the IRS.
You used yourself as an example, he used himself as an example, so I fail to see how he is required to provide another counterexample to you at this point.
"No one pays penalties for simple mistakes. That's what FOX news tells you, but it's not true"
My first reaction is "agree" as I have been through this as well.
But now I will modify that agreemet to recognize that not everyone is smart or capable enough to know how to approach fixing something like this with a letter. Or to take the time to read the letter or understand what is going on. Or maybe they go to the clerk at the tax prep office and they are clueless so they ignore the letter and then they have a bigger problem. Stuff like that does happen. There are probably more people who don't know or have the resources to handle this then people that do.
As an aside many years ago I received refunds of thousands of dollars of overpaid sales tax to a state by simply submitting a letter and a spreadsheet which they never audited or checked. I could have said anything with practically any amount (iirc maybe 20k was the amount requested inflation adjusted approx.). By simply presenting a spreadsheet showing the errors each month and writing a letter a check arrived back cheerfully iirc 6 mos. later. Just like that.
I should point out that I completely agree here. Streamlining any sort of manditory process, especially one like this that can affect people financially, is always a good idea. That, after all, is what the linked article is about.
But I'll also say that if you want to address tax complexities in a way that will most help those in need, catching unclaimed EITC returns (something like 30% of eligible filers don't claim it, I believe) is a much better use of effort than trying to eliminate underpayment mistakes.
Why are my points negative for my comment? Is it not true that he made a statement about FOX as though it were known accepted truth and did not back it up with a factual reference?
