On the pain scale, preparing income taxes falls somewherebetween a visit to the doctor and a visit to the dentist. All arenecessary in the long run, but oh so easy to put off until tomorrow, orthe next day, or the day after that.
But why do we procrastinate, foot-drag, dither and delayfiling our income tax, even when we owe nothing or can claim a refund?After all, as Ben Franklin observed, taxes rank right up there withdeath in life's short list of inevitabilities. Yes, you can delay thepaperwork by filing an extension (IRS Form 4868), but you cannot delaythe paying. What's more, failure to do either can seriously restructureyour financial picture for the worse.
Kathleen Vohs, assistant professor of marketing at theUniversity of Minnesota's Carlson School of Management, offers aclinical explanation for procrastination in general:
"People first choose to regulate their emotions, meaning thatthey would rather focus on feeling good for longer than deal with thisunpleasant task," she says. "When we are faced with an averse task,people who would rather manage their emotions first will give priorityto feeling good for longer, and consequently put off that unpleasanttask until the very last minute."
Money coach and author Ruth Hayden knows what drives herfoot-dragging clients:
"Usually, any form of procrastination is either fear orrebellion. How much am I going to owe? Are 'they' going to take it awayfrom me? What if I can't do this? So they just avoid it," she says.Steve Fishman, attorney and author of Working for Yourself(NOLO, 2006), says there may be more nefarious reasons why sometaxpayers delay or skip filing altogether."Maybe they are doing other kinds of cheating and are afraidthat if they file, the IRS will discover some of those bad things," hesays. "There are many, many people who don't file and they get awaywith it for years and years. But you never know when you'll get caught,and you'll face really big penalties when you do."Then there are the protesters who claim that income taxes areinherently illegal. You can read more about them in a special sectionof the IRS site devoted to frivolous tax arguments."These are the fringe groups that claim it's unconstitutional.These people have meetings and Web sites and stuff, but it's allridiculous," says Fishman. "The latest one who got caught was WesleySnipes. He listened to some of these people and claimed it was notconstitutional. That's not going to work."Slacker statisticsThe IRS estimates that 9.7 million individuals will apply fora six-month extension in fiscal 2006, out of 134 million individualForm 1040 filers. Although it's hard for the IRS to quantify nonfilers,the IRS National Research Program foundthat an estimated 13.6 million individuals, about 10 percent of thosewho were otherwise required to file, failed to do so in calendar year2001, at an estimate cost of $27 billion. That year, the IRS processed130 million individual returns.
That counterintuitive tendency to leavemoney on thetable isn't that unusual. According to the IRS, 1.3 million individualswho failed to file a tax return in 2004 left a total of $1.2 billion inunclaimed refunds in the coffers.Half of those nonfilers would have received a refund of more than $552.Some also may have been eligible for the refundable earned income tax credit. The slippery slopeThere are perfectly legitimatereasons to delay filing, and no penalty to do so, provided you applyfor an extension and pay the taxes you owe by the mid-April deadline.But failing to pay and/or file can be the first step down a very steepand slippery slope. San Francisco CPA and former IRS agentRobert Adams has represented clients before the IRS who have slippedwell down that slope. He estimates that four out of five clients withdelinquent tax issues are either self-employed or have Form 1099issues, while just one-fifth are W-2 wage earners. He says in manycases clients who fail to file continue to do so for fear of beingcaught and stuck with a bill they can't pay."Ihad a client who hadn't filed a tax return in 20 years. Guess what hisbusiness is? Bricklayer. Cash on the barrelhead," says Adams. Thatreluctant taxpayer's problem was compounded by his procrastination. If,as required by law, he filed all those delinquent returns, he would be,in Adams's words, "a dead man" because of the massive bill of unpaidback taxes plus penalties and interest.
Even wage earners, whose taxes aretheoretically withheld automatically, can get in a jam."Typically what happens is, he gets shortof cash, he goes to his employer and says, 'Change my withholdingallowance from one, which I'm entitled to, to nine because I have eightkids at home,' and he doesn't have the eight kids," Adams says. "Soessentially he gets no tax withheld. Then comes April 15th and he looksat his taxes and sees, oh my God, I owe $4,000. So he figures, since Idon't have $4,000, I won't send in my return, because if I do, they'llknow I owe $4,000 and they'll catch me."Our tax panel happily shoots down threerationales that lead tax procrastinators into trouble.Delusional thinking among procrastinators:Delusion No. 1: If I put off filing until the last minute,I'll have less chance of getting flagged for an audit amid the flood ofdeadline filers. "I don't think so," says Adams. "I've never heard thaton either this side of the desk or the other."Delusion No. 2: Since I didn't make all of my estimatedquarterly payments, I just won't file this year and can start freshnext year. "A lot of people miss an estimated tax payment in the courseof a year," says Fishman. "That's not that big a deal; you just have topay interest and a penalty, which works out to be about what you wouldpay on borrowing money."Delusion No. 3: I don't need to go to all the trouble offiling because I didn't make enough money to make it worth the IRS'strouble to come after me. "As a matter of fact, IRS statistics showthat people who make less money are audited more frequently than peoplewho make more money. The reason for that? Abuses of the earned incometax credit are unbelievable," says Adams.Gettingback on trackSo you've slipped, maybe several times.You're late or you didn't file at all. Don't panic. While the IRS canbe sticklers in many respects, they are quite flexible when it comes toworking out payment plans. You may even be able to reduce your overalltax bill through an offer in compromise.
Thefirst step may be the hardest: Get to the root of why youprocrastinated in the first place. Perhaps you have bad familyassociations with taxes, a divorce suddenly placed your taxes in yourhands and you don't want to think about it, or you are a successfulprofessional who is too embarrassed to admit that taxes baffle you."You can't suggest to a client to do an offer in compromise if he orshe still has fear about taxes, because part of the deal is, they can'tget behind again," says Hayden. "If you haven't dealt with why youprocrastinated in the first place, you're going to keep doing it. Theyhave to be in a routine in taxes before an offer in compromise can evenwork, because otherwise they'll just blow it." Thesecond step is to admit that you've been remiss. Best bet: Come cleanto an accountant who can help you explore your options before youcontact the IRS."If you're behind, justget current today," says Hayden. "That's the IRS philosophy. Thatrequires a structure change, because if somebody can't pay their taxestoday, they're always going to be in debt to the IRS."The third step is to resolve to live onyour net income, not your gross. That way, you'll avoid the tax trapfor good."Self-employedpeople think they can put off taxes because they don't have the cashflow and they spend their gross instead of their net," says Hayden. "Tocatch up is just too hard, and then it becomes absolute fear; theydon't know how to deal with it so they keep putting it off. You cannotspend your gross -- it's not a real number."Jay MacDonald is acontributing editor based in Texas.Bankrate.comis the Web's leading aggregator of information on financial productsincluding mortgages, credit cards, new and used automobile loans, moneymarket accounts, certificates of deposit, checking and ATM fees, homeequity loans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.
Source: Money & Work
CONTRIBUTE TO THIS STORY
