SO HOW DID MY TAX BILL GROW FROM $3,000 TO OVER $8.000?
by Yolanda-Smulik Roche, E.A. and Roger C. Roche, E.A.

We have all heard about the horror stories about unfortunate taxpayer whose tax bill got so large that they lost everything and then killed themselves. Every year another person get up before the Senate Finance Committee during their IRS oversight hearing and tells this same story, of how disbelieving IRS employees take everything from some one because the IRS made a mistake or failed to check the taxpayers story.

We recently had a call from a gentleman in his late 50's, who was disabled and dying. He was once a businessman who was stricken with a fatal illness. Needless to say, his life fell apart and he ended up living in a trailer in the desert. He called because the IRS was demanding payment of over $60.000 which he had no way of paying and was at a loss of what to do, he was desperate and scared that the IRS would take his daughter's belongings.

We advised him to call the number on the letter from the IRS and tell them his story, the whole truth, that he was dying and had no money. He called back in ten minutes a much happier man, he had made the call as we suggested and the IRS placed his account in "Un-collectable Status". This means that he will receive no collection letters nor will the IRS attempt to collect the debt.

This story illustrates the importance of not ignoring those collection letters. If you receive one, do not hesitate to call either a tax professional (Enrolled Agent, tax attorney or CPA) who can often negotiate a decent settlement without you ever having to talk to the IRS or call the IRS yourself and discuss your situation with one of their friendly agents. Remember, if you use a tax professional, they cannot answer an IRS question to which they do not know the answer but if they asked you, you would are required by law to co-operate with them. Just some words for thought.

So how does that relatively small tax bill you did not pay double or triple in amount? We have written before about the various penalties that the IRS can charge you but to save you time looking them up in old issues, we will once again list the penalties the IRS can charge a taxpayer.

Penalties can be expensive, of that there is no doubt, but it is not only the penalties that can make your tax bill inflate to the size of the moon, it is the INTEREST.

Congress has granted the IRS the authority to charge us interest on taxes not paid in a timely manner. The rate of interest is the Federal Short Term Interest Rate plus three percent. It is adjusted quarterly, determined during the first month of a quarter, to be effective during the next quarter. Now here is the kicker, this interest is COMPOUNDED DAILY which escalates the amount due rather quickly. Not only does the IRS charge you interest on the unpaid tax amount, you are also charged interest on the penalties, from the day the tax became delinquent. So if you fail to pay for 12 months and are assessed the maximum 25% failure to file pay penalty, you pay interest as if the full 25% was due and payable when the tax due became delinquent. The rate of interest since 1987 has varied from 12% to the current rate of 8%.

To illustrate how your tax bill can grow while you sleep, we just received a bill for one of our clients for whom we just filed their 1992 tax return with a tax owing of $3,702.48. The IRS charged our client penalties of $832.95 for filling late, $925.50 for paying late and $161.47 for underpayment of estimated taxes which totaled $1,919.92 which is over 52% in penalties. In addition , they charged $2.698.56 in interest which is 73% of the tax due. So by delaying filing and not paying for 5 years, the client has increased his liability 125%.

We would like to go on the record and state that we are in favor of abolishing the compounding of interest, simple interest would be punishment enough. If you feel this way, you can contact your congressman and express support for changing how the IRS calculates interest. By the way, you can find access to your representatives on the links page of web site, send them an e-mail today!.

The IRS Restructuring act which goes into effect at the beginning of the year, limits the IRS's ability to charge interest (a good thing). Interest and penalties on an individuals' income tax delinquencies will be suspended if the IRS fails to issue a notice specifically stating the liability and the basis for such liability within 18 months (one year for tax years beginning after 2003) following the later of the original due date of the return or the date on which a timely return is filed. The suspension will end 21 days after the date when notice is provided by the IRS.

Don't let this happen to you, file and pay your taxes.

Remember R.B.S. is better than their BS... © Copyright R.B.S. Tax Services, 2000