HITMAN discusses the problem that the IRS has collecting back taxes. He points out, “the reason is because someone may actually only owe about $10,000 dollars, but because of interest and penalties the IRS claims they owe $50,000 dollars!”
His solution – “if the IRS can’t collect because we can’t pay, and we can’t pay because the debts are too high due to penalties and interest, why doesn’t the IRS remove the penalties and interest?”
This does make some sense. However, the IRS could never permanently remove penalties and interest. If they did taxpayers would have no motivation to file and pay their taxes on time.
The IRS did make a concession in this area several years back by reducing the penalty on “late payment” of tax to .5% (1/2 of 1%) or the outstanding liability per month. This is a big difference from the penalty for “late filing”, which is 5% per month – or ten times more. So if you cannot pay the total amount of the tax due by the April 15th deadline, but you file a timely extension request, or actually file the return on time without a full payment, you are not hit too hard.
What I do believe would be a great help to the IRS, and generate millions and possibly billions of dollars in a short period of time, is to have a federal “Tax Amnesty” program similar to those that have been offered by many of the states over the years.
Here is how this would work –
The IRS would begin with the outstanding tax due only (no accrued interest and penalties would be included) on all previously filed federal tax returns (all types of federal tax - individual, corporate, income, self-employment, and payroll) that are not currently part of a criminal prosecution. From this they would deduct all amounts applied to date against this open liability from taxpayer payments, “garnishments” of subsequent federal and state tax refunds and rebates, other federal offsets, etc. (in my scenario no prior payments would be applied against previously assessed penalty and interest – they would all be used to reduce the original “principal”) The taxpayer would have until a specified future date – i.e. 3 or 6 months after the initiation of the amnesty program – to pay this amount without any penalties and interest.
At the same time individuals who have not filed tax returns could do so during the amnesty period and pay only the tax due, with no penalty or interest assessment. So if you did not file your 2005 (or 2002 for that matter) Form 1040 (or appropriate business or payroll return) at all because you owed $2,000, you could do so now and pay only the $2,000.
The IRS would mail to delinquent taxpayers an itemized “bill” for outstanding tax due under Amnesty based on their records, so it would be clear just what needed to be paid.
The way most amnesties work is that if the tax liability is not satisfied in full, or the delinquent returns not filed, during the term of the program a higher penalty and/or interest rate would apply to the outstanding liabilities – a further incentive to pay up.
The states have had great success raising substantial amounts of money, often more then anticipated, using a Tax Amnesty program. Besides the IRS already does forgive accrued penalty and interest to a degree as a part of its Offer In Compromise program.
After writing the first draft of this post (several days ago) I noticed that IRS HITMAN had changed his tune somewhat to conform with an Amnesty program rather than just doing away with penalties and interest altogether.
I call on my fellow tax professionals to spread the word about a Federal Tax Amnesty Program. Join me in writing to Congress. In addition to all the benefits to the US Treasury, the IRS and American taxpayer it certainly wouldn’t hurt our business!