Numbers recently published by The Internal Revenue Service show that less individual taxpayers are getting refunds. As this phenomenon increases, so are the number of collection cases as well as the interest and penalties associated with them.
In 2019 there were 16.8M taxpayers who owed the Service $308B. By 2022 those numbers had grown to 18.6B taxpayers owing $316B.
The reasons behind this include…
1 – With inflation’s rise and the accompanying wage increases not keeping pace, taxpayers aren’t withholding enough on their W-2’s. Given the economy, they need to get as much out of their paycheck as possible. As such, when they file their returns, they end up owing rather than getting a refund.
2 – The increase in the Gig Economy is creating significant problems. Most of these individuals are categorized incorrectly as Independent Contractors. Most of these taxpayers don’t realize that after payroll and income taxes, they’ll pay an average of 30% to 35% of their income for taxes. This nasty surprise is causing significant collection case issues.
The saddest part of this is that 5M of these taxpayers owe less than $1K in tax and another 6.3M owe between $5K and $1K. If the majority of the 18.6M open collection cases are under $5K, it tells you something about the finances of the average American.
A portion of this can be attributed to the IRS not sending out collection letters during the pandemic. SInce the letters didn’t go out, many didn’t respond and pay their tax debts.
Let me leave you with this.
Many years ago when tax programs became readily available to the general public, the IRS did a study on tax cheats.
They put together a study group of several thousand taxpayers and didn’t tell them which individuals would actually be a part of the study. They then watched the test subjects complete their individual income tax returns using one of the store bought programs.
They found that most taxpayers had a refund in mind that their spouse or family depended on to do things annually like buy cars or go to Disneyland. Most of the programs show what the refund is as you’re putting in the information.
So the majority of the taxpayers loaded in their return. And when the machine didn’t show the refund they needed to keep their spouse happy, they put in fictitious things like charitable contributions or unreimbursed business expenses until they ended up with the refund they were expecting.
The main conclusion of the study was that these taxpayers were actually more afraid of their spouses than the IRS. No matter what tax laws changed or whatever else changed in their financial lives, they couldn’t go to their significant others without that perceived refund in place.
This is the reason why the majority of those deductions where people cheated were eliminated in the Tax Cuts and Jobs Act of 2017. In that legislation, things like unreimbursed employee expenses were no longer allowed.
What I’m trying to explain is that the numbers published by the Service probably just scratch the surface. People doing their own returns still load up on non-deductibles in order to get the refund their spouse is expecting.
When those returns are audited, those couples run into my office, start screaming, and act like there’s something I can do.
We’re all going to get through this. Let’s get through it together.
As an inducement, we’re offering 33% off your first six months of bookkeeping and / or the first three months of electronic payroll services on a complimentary basis. In order to claim this benefit, please click on the appropriate button below and provide your contact information. We’d love to help.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Accounting Solutions Ltd.
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.