IRS Collections

What does it mean to get audited?

Back in the day, the word “audit” conjured up widespread fear and loathing. With an astonishing 5.6 percent of all Americans receiving that dreaded audit notice from the Internal Revenue Service in 1963, nearly everyone knew someone who had been subjected to a tax audit. The number of IRS audits has declined sharply since then, with a 23 percent decline in the past twenty years. Nonetheless, the IRS has not completely pulled the plug on audits, although budget cuts has precipitated a shift from all-encompassing in-person audits in favor of less cumbersome, less costly audits that focus on specific tax issues.

Five Reasons for an IRS Audit

So, why would a person or business get audited? Here are some of the reasons you may be audited by the IRS.

  1. Failing to report income
  2. Claiming too much in charitable donations
  3. Claiming too many business expenses
  4. Claiming a loss for a “hobby” activity
  5. Making errors on your return

Tax Return Errors

The vast majority of audits are related to items on tax returns that trigger red flags, such as math errors, inconsistencies between W-2 and 1099 forms.

Unusual Increases or Decreases in Income

Another common red flag is a return that shows a reported income or income far out of line with earnings from previous years.

Associated Transactions

You may also be audited if your tax return reflects transactions with another taxpayer who is being audited.

Above Average Withholding

Automatic red flags such as above average withholding for your income level may also trigger an audit.

Random Audits

A certain number of audits are the result of plain bad luck – returns chosen at random.

How Do You Know If the IRS Is Auditing You? The letter informing you that you are being audited should include a notice number in the right-hand corner. This notice number will indicate the reason for the audit. You should use this notice as a guide to determine which records you should gather. Scams are unfortunately common, so it’s important to understand the process. Learn more about the audit notification process in our blog: How to Know If The IRS Is Auditing You.

The Types of Audits

The audit notification letter you receive should also indicate what type of IRS audit you have been selected for. Depending on the type of audit you are facing, your tax matters could be settled in a matter of days or linger for months. For more involved audits, obtaining the services of a tax professional is highly advisable. Consider the following types of audits to better understand what it means to get audited.

Correspondence Audit

A correspondence audit is conducted by mail. Correspondence audits usually involve tax matters that are relatively easy to resolve. In most instances the IRS is seeking copies of checks, receipts and other documentation to support deductions or credits that you have claimed, or to clarify other items on your tax return.

Office Audit

An office audit is conducted in person at your local IRS office. You should be prepared to report to the office with copies of the requested documentation. You may also have a legal representative or your tax preparer present during the audit.

Field Audit

Like an office audit, a field audit is also conducted in person. Unlike an office audit, a field audit is conducted in your place of business. You should be prepared to present copies of your documentation at the audit, and your legal representative or tax professional should also be present. You are not obliged to allow IRS personnel into your home unless the agency has obtained a court order. If you claim the home office deduction, agents may request to enter your home; if you refuse the request, your deduction will almost certainly be disallowed.

Taxpayer Compliance Measurement Program Audit

The IRS uses Taxpayer Compliance Measurement Program (TCMP) audits to update the data it uses to write it computer scoring program. This is the most extensive type of audit, which examines every aspect of your tax return. If you receive notice of a TCMP audit, you should be prepared to present exhaustive documentation, including birth and marriage certificates.

Can You Go to Jail for an IRS Audit?

While an audit may require significant effort on your part to gather the documentation required, it should not inspire panic. The unofficial threshold set by the IRS for tax fraud is at least $70,000 in unlawfully uncollected taxes and at least three years of fraudulent conduct. Therefore, while the odds are stacked against you in terms of escaping without additional tax obligations, it is extremely unlikely that as an honest taxpayer, you will face criminal charges or jail time as a result of an audit.

Learn more about tax fraud and how it happens with Optima Tax Relief. If you need tax help, contact us for a free consultation.

What is Tax Evasion and How can it Affect You?

For some, it can be a terrifying ordeal to file your tax return, especially if you forget to include vital information when filing. It is important for taxpayers to double-check whatever they have placed on their return in order to avoid the IRS further looking into your tax return. The IRS will flag a taxpayer’s return if they notice that the income reported in inaccurate, if there are too many credits and deductions placed on the return, or if a taxpayer has not filed a required tax return. Although the IRS does not pursue many tax evasion cases, it is the taxpayer’s responsibility to ensure they are filing correctly to avoid the IRS investigating them – and finding something that can send them to jail. If you still have questions on what should be included in your tax return and how to properly file, here are some ways to avoid the IRS coming after you.

The IRS will usually start off with an audit process rather than taking immediate action against a taxpayer. During the audit process, the IRS will review the tax return(s) filed by a taxpayer to see what errors were knowingly made. If the IRS sees that a taxpayer has repeatedly made the same mistakes on several of their tax returns, such as not fully disclosing large amounts of income they had been receiving throughout multiple years, it could be seen as tax evasion. If a taxpayer continuously makes false statements and hides records like bank statements from an IRS auditor, it could potentially lead to criminal prosecution.

To avoid running into trouble with the IRS, specifically avoiding an audit, or being charged with tax evasion it is important to understand what you should include on your tax return. Whatever income you are earning needs to be included on your tax return. This means that if you have a full-time job as well as a side job, you must report both sources of income. If you also meet the filing requirements, you must file your tax return with the IRS. Avoiding filing a return for multiple years could be considered tax evasion by the IRS. This could also lead to the IRS looking further into the unfiled years and file a tax return on your behalf, which could cause any owed liability to increase on top of the penalties and interest you accrue for not filing in the first place. 

Understanding the IRS as well as their rules will help you navigate the tax filing system put into place. It is up to every taxpayer to keep themselves informed on any tax changes that may occur throughout the year and to also be transparent on their tax return by disclosing any information that may be vital for the IRS to know. If you are unsure of how to file and need further assistance, you can ask the advice of a tax attorney or a tax relief company that can provide you with the necessary assistance you need in order to get compliant with the IRS.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What Should You do if You Owe the IRS Money?

Having a tax liability with the IRS can be stressful to deal with.  It may even sound easier to avoid your debt altogether. For some taxpayers, paying back your balance to the IRS can prove to be difficult, especially if you don’t have the means to do so. You may feel as though you are backed up against a wall and that there is no hope to help resolve your current situation.  However, there are solutions to keep yourself compliant and out of collections with the IRS so you don’t have to live in constant fear that the IRS is coming after you. The IRS offers solutions for those having difficulty paying their balances in full.

Setting up a Payment Plan

It is important to first understand how much you owe. You can verify the amount owed by referring to your tax returns or by directly contacting the IRS to discuss your balance, including any tacked-on penalties and fees.  The IRS will provide you with a 433F form to fill out your income and expenses. When completing the form, be sure to exclude non-allowable expenses, such as credit card payments, pet-related expenses, or magazine subscriptions.  The IRS typically accepts payment agreements if your balance is under $10,000 and the proposed payment will pay the balance in full.  Your agreement is also required to include any accrued interest and/or penalties.

The IRS Offers Hardship Options

For those who are either unable to pay back their tax liability in full with the IRS or don’t have the ability to be on a monthly payment plan due to financial difficulty, the IRS offers hardship options. The IRS has two options available to those who need temporary relief. The first is a Currently Non Collectable agreement. The IRS will review your income, expenses, and assets to see if you are earning very little to no income. Another hardship option the IRS provides is the Partial Pay agreement. This agreement is similar to a regular installment agreement where you would make monthly payments to the IRS. However, with this agreement, you are only paying back part of the taxes you owe over time. The IRS will review this agreement approximately every two years to see if your financial income has changed. If your income has changed or you have started a new job, the IRS will send you a notice informing you that your income reflects that you have the ability to pay and request that you set up a payment plan with them. If you are attempting to request a hardship agreement with the IRS, they will request the following:

  • Last three months’ worth of bank statements 
  • Proof of income for the last three months
  • The market value for all assets
  • A list of everything that a taxpayer may own (Retirement savings, bank accounts, all sources of income, real estate property, vehicle statements, life insurance policies, etc.)

Request for an Extension 

If you do have the ability to pay your balance in full but need some time to get the money together, the IRS will allow you to request a one-time extension. You can request up to 120 days to pay your tax balance in full. It is important to keep in mind that the IRS will apply a 0.5% penalty per month for the unpaid balance and will only allow you to make this extension once. If you do miss the extension date, you will fall back into collections.

The IRS offers an array of options to ensure that you stay compliant and out of collections. If you are having difficulty paying your full tax balance to the IRS right away, it is important to know your options and what you can do to protect yourself. If you are unsure of what to do, you can always speak to a tax relief company such as Optima Tax Relief or the IRS to get a better understanding of what works best for you. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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The Difference Between a Lien, Levy, and Garnishment

The IRS can be problematic to deal with – especially if you don’t have a clue about anything tax-related. For those who owe a liability to the IRS, it is important to understand how the IRS works in addition to any potential action the IRS can take against you. If a tax balance is owed, they can place you into collections, garnish your paychecks, place a lien on your physical assets, or even levy your bank account(s). Here is what you need to know about the IRS taking action against you, and how to prevent yourself from falling into collections.

Liens

A lien is something that the IRS can place against you if you owe a tax liability. The IRS has the ability to place liens on physical assets such as a home or vehicle in order to ensure they receive the maximum amount of money if a taxpayer intends on selling their assets; they will take a portion of the profit of the sold asset and apply it to the balance owed to them. You can avoid having a lien placed against you by paying your balance owed in full and on time or, if you cannot afford to pay your balance off, you can contact the IRS to see what type of payment plan options you can be placed on. 

Levies

The IRS will send several collection notices warning a taxpayer of their intent to levy if the balance owed has yet to be paid in full. A levy occurs once the IRS considers you a delinquent taxpayer and they will go after your bank accounts, wages, or property in order to settle the debt that is owed. In some cases, the IRS will only seize a small sum of money from a taxpayer.  Other times, they will take a taxpayer’s entire savings and apply it to their tax balance. To stop an IRS levy, you can contact them directly and request they release the levy if you can prove that you are currently in a hardship. They will also release their levy if you can pay the amount owed in full, the collection period to collect the liability on your balance has ended, or the value of your property is more compared to the amount owed to the IRS. 

Garnishments

The IRS can also garnish your wages if you have an unpaid balance. The IRS can legally seize your income and apply it to the balance owed to them and garnish your paychecks, commissions, or any bonuses. There are a couple of ways to stop the IRS from garnishing you, you can either pay your balance in full or contact the IRS to set up a payment plan or hardship agreement if you qualify. 

The IRS will act against those who fail to pay their tax balance and they can and potentially will attempt to garnish, levy, or place a lien against you should you ever owe a tax liability. It is expected that all taxpayers remain compliant with the IRS and adhere to the most current tax laws in order to stay out of collections. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What Could Happen If You Don’t File Your Tax Return?

It is not hard to fall behind on your taxes. This can happen for a number of different reasons, such as you were unable to afford any tax services, you simply forgot about the tax deadline, or you suffered a serious illness which left you unable to file your tax return. It can be easy to avoid filing your tax return and ignore any serious repercussions – until the IRS starts sending you notices informing you of your unfiled tax years or a delinquent debt you have failed to pay. The IRS has the ability to take action against you for failure to file so it is important to know what the possible consequences could be for not filing your tax returns. 

The IRS can file a substitute return for you

The IRS can file a Substitute for Return, or SFR, on your behalf if they notice a failure to file for any tax year or years. The IRS does not file an SFR as a courtesy for those who fail to file their tax return and will not include any exemptions or deductions. Because of this, filed SFRs can reflect that a taxpayer owes a tax liability. The IRS will also send out an informative collection notice stating that a substitute return was filed or if there is a tax balance associated with the SFR.

The IRS has no time limit to collect from you

When it comes to the IRS taking collection action, the IRS has no timeline as to when they can stop. Once the IRS assesses a balance against you, they can garnish your wages, levy your bank accounts, and place liens on your physical assets. Just because you have past tax years that are unfiled, it does not mean the IRS has forgotten. It could even mean that the IRS will have the ability to hold you liable for your tax balance for up to 10 years from the date that your balance was assessed. 

Failure to file your tax return could be considered a crime

For some taxpayers, failing to file your tax return could mean getting in serious trouble. The IRS could consider this a crime and assume that you are evading the liability that they have assessed on your behalf. Consequences for not filing your tax return could mean jail time or fines as high as $250,000. 

Why it is beneficial to file your missing tax return

Filing all outstanding tax returns is important in order to avoid having the IRS take collection action against you. Although there is not a time limit for you to file any past tax years, the IRS does put a limit on receiving a refund for a previous tax return. The IRS also allows you to collect on a tax refund for up to three years from the due date of your return.

Filing your tax returns may not be the most exciting thing to do and some may even dread the filing season as it comes every year. Regardless of how you feel about having to file, it is a requirement in order to stay compliant and out of collections with the IRS. If you do have unfiled tax years, it can be beneficial to speak with a tax attorney or a tax resolution company in order to resolve any outstanding debt you have for the unfiled years or any tax debt that was assessed against you when the IRS filed an SFR for you. 

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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How IRS Debt Can Ruin Your Travel Plans (and Jeopardize Your Passport)

The stress of owing the IRS can be overwhelming. The ever-present threat of having a lien placed on your assets, the fear every time you check your bank account to discover it has been levied dry, the strain of having the IRS garnish your monthly wages; these are just a few of the things that millions of Americans go through every day. Now, the IRS has made further changes to crack down on Americans who have not paid their taxes.

As of February 2018, Americans who owe the IRS more than $50,000 are at risk of having their passports revoked. If you have unpaid taxes owed to the IRS, it is important to either pay your balance in full or go on a monthly installment agreement in order to avoid having these travel restrictions placed on you. The State Department is now working alongside the IRS to not only revoke existing passports but to also deny any passport application for those with seriously delinquent tax debt.  (If you are overseas and your passport is denied, the State may issue a temporary passport that has limited validity to return to the United States.)  Essentially, until the tax debt is settled with the IRS, people will be placed on this new “No Passport” list.

There are a few exceptions to be aware of.  You won’t be at risk of being placed on the “No Passport” list if you are currently going through bankruptcy, if the IRS acknowledges you have been the victim of identity theft, or if there is a natural disaster declared on a federal level.  You may also be able to keep or renew your passport if you have a request pending for an installment agreement, have a pending offer in compromise with the IRS or if the IRS has accepted an adjustment that will satisfy your debt. And if you are placed on the “No Passport” list, the IRS will hold your application for 90 days to allow you to resolve your tax liability, pay your balance in full or enter into an installment agreement before revoking your passport.

This is yet another sign that the IRS is escalating their collection efforts against Americans who have unpaid taxes and another reasovn for you, as a taxpayer,  to stay current and compliant with their IRS filings.  If you are in the unfortunate situation of having delinquent IRS debt, it is wise to speak to a qualified tax professional who can help you evaluate your options sooner rather than later. Because when it comes to owing money to the IRS, delaying is almost always a losing strategy. For more information regarding on the IRS passport revocation and denial policy, click here!

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

IRS Criminal Investigation Releases Fiscal Year 2014 Annual Report

The Internal Revenue Service announced the release of its IRS Criminal Investigation (CI) annual report for fiscal year 2014.   IRS CI initiated 4,297 cases in FY 2014, focusing on international tax fraud, return preparer and questionable refund fraud, identity theft, public corruption, bank secrecy act violations, significant money laundering investigations and terrorist financing cases.

BN-IG445_IRSCYB_J_20150505144950“There is no doubt that we have had to be creative to overcome some of the budget challenges this year,” said Richard Weber, Chief, IRS Criminal Investigation Division. “But in so doing, we maintained a steady focus on what is important. Our highest priority is to enforce our country’s tax laws and support tax administration to ensure compliance with the law and combat fraud.”

Historical Snapshot and Agency Priorities

The annual report highlights the agency’s successes while providing a historical snapshot of the makeup and priorities of the organization. Lincoln Irey, the first chief of IRS CI, released an annual report every year during his tenure, which extended from 1919 to 1946.

As the only federal law enforcement agency with jurisdiction over federal tax crimes, CI boasted the highest federal law enforcement conviction rate in FY 2014 — an impressive 93.4%. Prosecutors nationwide routinely call on IRS CI to lead financial investigations for financial crimes ranging from identity theft to international tax evasion and transnational organized crime.

“We are incredibly proud of our conviction rate,” said Weber. “As a federal law enforcement agency, that conviction rate reflects the pride of our agents and the quality of our case work. We are the best financial investigators in the world and I am extremely proud of our special agents and professional staff.”

Big Wins for IRS CI

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in an effort to generate confidence in the tax system and encourage compliance with the law. The 40-page report includes case summaries on a range of tax crimes, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes. The report also reflects the diversity and complexity of CI investigations, which touch almost every part of the world.

511aa8b798600.preview-620For example, two of the biggest tax fraud stories of the year — Credit Suisse and Bank Leumi — are included in the report. In the largest tax fraud case ever filed, Credit Suisse pleaded guilty to conspiracy to aid and assist U.S. taxpayers in filing false income tax returns and agreed to pay a total of 2.6 billion dollars. CI also led the investigation against Bank Leumi Group, a major Israeli international bank that admitted conspiring to aid and assist U.S. taxpayers to prepare and present false tax returns and agreed to pay 270 million dollars. Bank Leumi also pledged to cease providing banking and investment services for accounts held or beneficially owned by American taxpayers. The Bank Leumi Group case marks the first time an Israeli bank has admitted to such criminal conduct.

“The budget challenges facing our agency are nothing new. In the past five years, CI’s staff has been reduced approximately 11 percent bringing staffing to 1970’s levels. This trend cannot continue,” Weber added. “We will continue to remain focused on finding and investigating great cases that make a real difference in compliance of our nation’s tax laws.”

How Has The IRS Fresh Start Initiative Adapted To Help Taxpayers?

Since its inception in 2011, the IRS Fresh Start Initiative has changed to meet the needs of taxpayers.  Its scope has expanded in several ways to cushion the blow of back taxes and penalties.

●        Taxpayers unable to pay their entire federal tax bills can apply for an Offer in Compromise (“OIC”) to reduce their tax burdens.  Essentially, the OIC allows taxpayers to settle their delinquent federal tax bills for less than the full amount that they owe. An OIC also streamlines the process of investigations and shortens the time that taxpayers spend repaying the IRS.  Taxpayers with complicated tax returns should employ the assistance of a  tax relief professional to negotiate a fair OIC agreement.

fresh start●        Taxpayers who do not qualify for an OIC can negotiate manageable monthly payments through an IRS installment agreement. Previously, taxpayers who owed more than $25,000 in back taxes were subject to an invasive income examination process to determine the amount of their monthly payments. The IRS Fresh Start Initiative has raised that limit to $50,000, making it possible for more taxpayers to negotiate a streamlined installment agreement. However, taxpayers owing less than $50,000 may still wish to consult with a financial professional to ensure that a prospective installment agreement is mutually beneficial, not just for the IRS.

●        One method the government uses to recover back taxes and penalties is the filing of liens against taxpayers’ property.  This could mean real estate, business assets, and vehicles.  A tax lien against property can make it difficult to get credit and can also result in  property being auctioned off.  Originally, tax liens would be filed automatically for taxpayers with delinquent federal taxes of at least $10,000.  The IRS Fresh Start Initiative has raised the lien-triggering amount to $50,000, although the IRS still has the latitude to file liens for taxpayers who owe less.

The IRS Fresh Start Initiative was introduced as a way to make it easier for taxpayers to compromise with the government when paying back taxes and penalties.  The changes made to the program since 2011 help the taxpayer settle disputes quickly, avoid inconveniences, and save money.

Congress Considers Provision to Turn Back Taxes Over to Debt Collectors

As of May 2014, the gap in federal income tax collection was approximately $385 billion according to Forbes. More than 5 million taxpayers were in arrears as of April 2014, the Washington Post reported. Under a bill introduced by Democratic Sen. Chuck Schumer of New York and Republican Sen. Pat Roberts of Kansas, the IRS would outsource collection efforts against delinquent taxpayers that its agents had been unable to contact within the past year to private collection agencies.

Schumer’s and Roberts’s bill was inserted into the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act, sponsored by Democratic Sen. Ron Wyden of Oregon in May 2014. The EXPIRE Act restores several federal tax breaks that expired at the end of 2013. As of November 2014, the EXPIRE Act remained stalled in Congress.

courtsDebt Collectors and the EXPIRE Act

Efforts by private collectors to recover what the IRS calls “inactive tax receivables” would not apply to innocent spouses, military personnel deployed in combat zones and deceased taxpayers. However, heirs of deceased taxpayers may find themselves subject to collection efforts to recover estate taxes owed by the deceased. Taxpayers subject to penalties under the Affordable Care Act would also be subject to private collection efforts. Presently, four private debt collection agencies are approved by the Treasury Department: ConServe of Fairport, New York; Pioneer Credit Recovery of Arcade, New York; CBE Group of Cedar Falls, Iowa, and Performant Financial Corp. of Livermore, California.

The idea of using private collection agencies to enhance the collection of IRS revenues is not new. Past programs have netted limited success. A similar program administered from 1996 to 1997 resulted in a net loss of $17 million to the IRS, according to the Center for Responsible Lending. The most recent attempt to utilize private collectors to recover revenues from taxpayers in arrears took place between 2005 and 2009 and collected a total of $98 million. However, the program cost the IRS $86 million to administer. An additional $16.5 million was paid in commission to the private collection companies, resulting in a net loss to the IRS of about $4.5 million, the Post reported.

Support and Pushback

congressDespite past failures associated with utilizing private collection agencies to collect tax revenues, the Schumer-Roberts bill enjoyed bi-partisan support in both the House and the Senate. Advocates for the measure claimed that the IRS could net $4.8 billion in delinquent taxes over the next decade, according to the Post. Half of those revenues would be devoted to the cost of expanding research and development tax break for startup businesses. Another $1.2 billion would go toward hiring additional IRS agents and enhancing in-house collection enforcement. The remaining $1.2 billion would cover commissions paid to private collection agencies.

Schumer has been a longtime advocate of employing private collectors to recover federal tax revenues. He claimed that this particular measure would provide jobs for residents in his state’s poorest areas without requiring a reduction in federal jobs. Indeed, two of the four private collection firms presently approved by the Treasury Department to recover overdue tax revenues are located in Schumer’s home state.

Sen. Ben Cardin of Maryland pushed to revise the EXPIRE Act to remove the private debt collection provision. Rep. Steny Hoyer of Maryland and Rep. John Lewis of Georgia, both Democrats, also vigorously opposed the proposed bill, stating that private collectors are more focused on the bottom line than serving taxpayers. Other detractors noted that extra precautions would be required to protect sensitive taxpayer information from abuse by unscrupulous collectors. During past programs, taxpayers complained of abusive tactics by collection agencies, including harassment and threats.

calculateNational taxpayer advocate Nina E. Olson submitted a 21-page letter appealing to lawmakers in May 2014 urging them to reject the proposal. Olson insisted in her letter that the majority of taxpayers in arrears are financially unable to pay what they owe and not deliberate scofflaws. Olson also stated that paying commissions to private collection agencies was an unnecessary expense, because the IRS collects much of its revenue from delinquent taxpayers in the form of offsets of federal and state income tax refunds. Moreover, IRS agents have latitude to work with struggling taxpayers to form repayment agreements or make other arrangements to collect payments from taxpayers in arrears which private collection agencies do not have.

Tax Collection and the IRS

IRSThe IRS has a well-deserved reputation for being vigorous in collecting the revenues it is owed from individual taxpayers even without enlisting the aid of private collection agencies. Indeed, the IRS collects more than $2 trillion in federal taxes annually. The overall compliance rate for on-time payment of federal income tax is 84 percent.

The Treasury Department also has potent tools at its disposal for pursuing delinquent taxpayers domestically and abroad, including offsets of federal and state tax refunds as well as liens and levies. IRS levies in particular can be harsh, involving seizures of personal property or extracting significant chunks of wages and even Social Security payments and retirement pensions. A single person levied by the IRS in 2012 could have been forced to live on as little as $114.42 per week, Bills.com reported.

How Taxpayers Loaned $192 Billion To The Government In 2013

Very few people enjoy paying taxes, and even fewer wish to overpay on their federal income tax returns. But 80 percent of taxpayers voluntarily do just that each year. Many of these same taxpayers celebrate when they receive large refund checks, failing to realize that they are merely recovering their own money.

According to an April 2014 article in the Washington Post, federal income tax over-payments by individual taxpayers totaled an eye-popping $192 billion last year. This figure represents the equivalent to one quarter of the entire federal budget deficit for 2013. By overpaying on their tax returns, taxpayers essentially provide the government with an annual 12-month interest free loan, a deal which the IRS does not reciprocate.

Regions with the Highest Rates of Income Tax Refunds

refundsThe regions with the highest rates of taxpayers receiving refunds are found in Appalachia and the Deep South. For instance, in Chattahoochee County, Georgia, an astonishing 95 percent of taxpayers received federal tax refunds during the previous year, according to the Post. It is no coincidence that these regions are also among the most impoverished in the country. Taxpayers in these regions of the country often have low or no federal tax obligation.

Many taxpayers in these areas also benefit from deductions and credits like the Earned Income Tax Credit (EITC), which is a refundable credit. Taxpayers who qualify for the EITC can receive some or all of the credits in the form of a tax refund check, even if they have no federal income tax obligation. The refunds of many low-income taxpayers in this region and elsewhere in the country are drawn from the EITC.

Areas with High Proportions of Taxpayers Owing Tax

dueAn additional 15 percent of taxpayers nationwide owed money to Uncle Sam, with an average tax obligation of $4,656, the Post reports. These taxpayers were largely concentrated in metropolitan areas on the East and West coasts, and in the Plains states. Many of these individuals were self employed entrepreneurs, ranchers and farmers, filing Schedule C, E or F along with their federal income tax returns.

New England and the Plains States

In Liberty County, Montana, only 38 percent of taxpayers received federal income tax refunds. Another 32 percent of taxpayers in Liberty County essentially broke even with Uncle Sam, neither receiving refunds nor owing additional federal income taxes. Liberty County is representative of the states in the upper Plains region, which featured a high concentration of break-even taxpayers. Other states with high numbers of break-even taxpayers include Michigan, Pennsylvania and Vermont, according to the Post.

Lending to Uncle Sam at Zero Interest

uncle_samIn 2012, the average tax refund was a whopping $2,742 according to the Post. And while many taxpayers enjoyed receiving those large checks, a broad consensus of financial experts agrees that it’s actually a bad financial deal. Taxpayers receive no interest on their refunds unless the IRS delays the processing of their refunds by at least 45 days after the filing date of their federal income tax returns. The amount of interest paid is adjusted quarterly. For 2014, the quarterly interest rate paid by the IRS on delayed tax refunds was a paltry 3 percent.

The IRS is not nearly so generous with taxpayers in arrears. Even if you file your return on time, if you don’t pay your full federal income tax obligation, the IRS tacks on a failure-to-pay penalty of ½ of 1 percent on the amount due EVERY MONTH or partial month after the filing due date. The total penalty can equal 25 percent of the amount owed. Taxpayers who request an automatic extension of time to file do not automatically escape the failure-to-pay penalty. These taxpayers must pay at least 90 percent of what they owe by the ORIGINAL due date to escape the penalty.

Neither a Borrower nor a Lender Be

moneyMost taxpayers understandably don’t want to owe money at tax time, so they hedge their bets by overpaying. While it’s a good idea to allow for a small cushion to cover income tax withholdings, the IRS also cuts taxpayers who honestly underestimate their tax obligations a bit of slack. You can escape what the IRS calls the underpayment of estimated tax if your total federal tax obligation is less than $1,000. You may also escape the penalty by paying 90 percent of the current year’s federal tax obligation or 100 percent of your tax obligation for the previous year, whichever is smaller. Wage earners can make adjustments in the withholdings listed on W4 forms. Self-employed workers can meet this obligation through quarterly estimated tax payments.

Many taxpayers enjoy receiving their refunds in a lump sum rather than as small additions to their paychecks. That’s understandable as well, but it’s not necessary to overpay Uncle Sam to achieve that goal. Simply divide your average tax return by the number of paychecks you receive. Open a savings account or money market account and deposit the resulting amount into your account with each paycheck. If you want, you can make periodic transfers from your account into a Certificate of Deposit or other investment instrument. At the end of the year, you will have accumulated a tidy sum that equals or exceeds what you would have received as a tax refund.