As Americans struggle with the economic downturn, the IRS says it is trying to be more flexible this tax-filing season with those who are in financial trouble. IRS Commissioner Douglas Shulman says the agency can be lenient in hardship cases.
NPR's Melissa Block talked with Shulman about that initiative and posed questions from e-mails sent in by listeners.
Reaching Out To Taxpayers
Even if someone cannot pay all their taxes, "the most important thing is for people to file their taxes on time," Shulman said. "If they can't pay, they should attach a note" to the tax return, and either contact the IRS or wait for the agency to call.
There are several options, including an installment plan, to take care of lingering tax issues, he noted. The last thing people should do, Shulman said, is to disappear "because then if we find you, you'll actually be in trouble."
Of course, a long delay in paying taxes could bring penalties and interest on the money owed.
"But we have the ability to abate penalties," Shulman said. "By law, you have to pay interest, because we're giving you a loan."
Even with that flexibility, he said, anyone capable of paying their taxes is expected to do so.
"Government is being called on to do a lot more right now," he said. "We do need to collect the money to fund the federal government."
Listeners' Questions
In an e-mail, Homer Williams of Reading, Pa., asked, "Like most people, my IRA has tanked. It is now worth less than my original contributions. In ordinary times, I have to pay taxes on the earning as I withdraw from it. With the loss, when can I deduct the loss?"
"Your listener probably won't like this answer," Shulman said. "When you put money into an IRA, you're actually putting pre-tax money in. So, you never paid taxes on that. And therefore, when it declines, on an IRA, you don't claim gains or losses."
Shulman said in reference to a related question that taking money out of an IRA can bring taxes and penalties.
But "under some circumstances, you can actually pull money out without paying the taxes or having penalties," he noted. "Those circumstances depend on your age, if you have a disability and what you're going to spend the money on."
Shulman urged people in that situation to talk to their plan administrator, call the IRS hotline at 1-800-TAX-1040 or visit the IRS Web site.
Another listener, Jane Gordon of Portland, Ore., wrote in to ask, "Why are unemployment benefits taxed? When you are unemployed, you need every penny of that little bit of income."
Even unemployment counts as income, Shulman said, and so it is taxable.
That situation will improve somewhat next year. Thanks to a recently passed law, the first $2,400 of unemployment benefits received in 2009 will be tax-exempt, he said.
In an e-mail, Jim Huddleston of Lawrence, Kan., said he read that the IRS "is not collecting about $300 billion a year — and that the entire stimulus package could be paid for in three years if the effort was made to collect."
"Why don't you do it?" he asked.
"That's a great question," Shulman said. "What he's referring to is the estimate number out there for what we refer to as the tax gap" — what the agency believes it is owed in a given year, minus what it collects.
"Every country has a tax gap," he said. "And the U.S. actually has a highest voluntary compliance rate in the world."
Shulman said the missing money can be blamed on taxpayers who make honest mistakes and people who avoid paying what they owe.
"We take very seriously our service and our enforcement obligations ... all trying to get to the right place with the American people," he said.
Shulman predicts that if Congress were to pass new laws requiring more income data to be sent to the IRS, tax revenue would increase. For instance, he said, Congress passed a bill last year requiring brokerages to send information on capital gains from the sale of stocks and bonds to the IRS.
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