What You Need to Know About Paying Your Taxes
If you don't pay up you'll be penalized -- unlike some high-ranking public officials.
1. Even the pros make mistakes. Just ask Treasury Secretary Timothy Geithner, who admits he failed to pay more than $34,000 in self-employment taxes between 2001 and 2004. Or Rep. Charles Rangel (D-N.Y.), chairman of the House tax-writing committee, who neglected to report $75,000 worth of rental income from his Caribbean beach house. Geithner paid the back taxes and interest, but the IRS (which he now oversees) graciously waived the penalties. Rangel simply wrote a check for more than $10,000 in back taxes, and he hasn't had to pay any penalties, either.
2. Ignorance is no excuse. Geithner used tax software (but admitted the error was his fault). Rangel attributed his unreported foreign-earned income to a "language barrier." But it doesn't matter. When you sign a tax return, whether you prepare it yourself or leave the number-crunching to a professional, you are responsible for the accuracy of your return and the consequences if you make a mistake.
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3. You won't get off so easy. Most taxpayers who fail to file or pay their taxes on time face stiff penalties and interest charges. Say you owe the IRS but you don't have the cash to pay. If you file your return by April 15 -- or you file for an extension to push your tax-filing deadline (but not your tax payment) back to October 15 -- you'll incur interest charges and a penalty of 0.5% a month on the unpaid balance, up to 25%, until the taxes are paid.
Still, if you owe taxes, it's better to file on time and delay paying your bill than not file at all. That's because the penalty for not filing is ten times higher. For instance, if you file for an extension and pay your $5,000 tax bill three months late, you'll owe a $75 penalty plus interest. But if you don't file your tax return on time and pay your tax bill three months late, you'll owe a $750 penalty plus interest. At that rate, it may be cheaper to pay your taxes on time with a credit card -- or borrow money from your local loan shark.
4. You could lose your house. If you don't pay up, you're in for a fight that you probably won't win. The number of levies issued by the IRS -- including seizures of wages, pensions, tax refunds, bank accounts and property -- increased by 1,600% in recent years, from 220,000 in 2000 to 3.75 million in 2007. Although the IRS seldom seizes a house, it can place a lien that prevents you from selling it or refinancing your mortgage until your tax debt is paid in full. And even filing for bankruptcy may not protect you; the IRS can force you to sell your home or raid your retirement accounts -- assets that are explicitly excluded from certain types of bankruptcy liquidations -- to settle a tax debt.
5. But you probably won't get caught. Americans profess to abhor tax cheating (in the latest survey of taxpayer attitudes, 89% described it as unacceptable). But unless IRS computers spot a discrepancy -- such as a shortfall between the salary you report and what your W-2 says you were paid -- the chances of getting caught are minuscule. Maybe that's why there's a $350-billion annual gap between what Americans owe and what they pay. Possible solution: Appoint everyone to cabinet positions so they have to 'fess up. That would be one way to help finance the economic-stimulus package.
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