MONEY Taxes

These Are the People Who Are Most Likely to Get Audited

woman on balcony of modern house
Getty Images The uber-rich have the most to fear when it comes to tax audits.

As tax season draws to a close, you may be wondering if you're at risk. (Hint: Probably not.)

If Tax Day has you worrying about an IRS audit, you probably have little reason to be nervous. Last year, the IRS audited less than 1% of all taxpayers—and the federal agency is on track to audit even fewer people this year.

“The math is pretty simple. There are fewer audits because we have fewer auditors,” IRS commissioner John A. Koskinen told the New York State Bar Association in February. “The IRS lost more than 2,200 revenue agents since 2010. Last year alone, there were 600 fewer auditors, with the total falling to 11,600—the lowest level in more than a decade.”

Still, some Americans are subject to more scrutiny than others. The IRS doesn’t spell out why auditors single out some returns for special treatment, but a look at the agency’s track record provides some clues. Here are the groups that are more likely to get the government’s attention:

1. People who report more than $10 million in income—or none at all

It’s like the old saying about why the bank robber robbed the bank: “Because that’s where the money is.” With limited resources, the IRS takes a harder look at people with the most money (and the most to hide). In 2010, then-commissioner Doug Shulman told the New York State Bar Association targeting the rich was part of a new strategy to “work smarter.”

“This is a game-changing strategy for the IRS,” Shulman said. “Initially, we will be focusing on individuals with tens of millions of dollars of assets or income. Going forward, we will take a unified look at the entire complex web of business entities controlled by a high wealth individual, which will enable us to better assess the risk such arrangements pose to tax compliance.”

In 2014, the IRS audited more than 16% of returns reporting more than $10 million in income. But, as you can see in the table below, single-digit millionaires should take care with their tax returns as well.

Another group with a high-than-average chance of getting audited? People who report no income. If you’re reporting an operating loss on your business, the IRS might double check that you’re being honest. In 2014, the IRS audited 5.3% of the taxpayers who reported no income.

Otherwise, if you—like the majority of American taxpayers—earn between $25,000 and $200,000, you have a better-than-average shot of dodging an IRS audit. Here’s the breakdown:

Returns by Income

Percent of total returns

Percent audited in 2014

All returns 100% 0.86%
No adjusted gross income 1.83% 5.26%
$1 – $24,999 39.08% 0.93%
$25,000 – $49,999 23.32% 0.54%
$50,000 – $74,999 13.12% 0.53%
$75,000 – $99,999 8.33% 0.52%
$100,000 – $199,999 10.70% 0.65%
$200,000 – $499,999 2.87% 1.75%
$500,000 – $1 million 0.48% 3.62%
$1 million – $5 million 0.24% 6.21%
$5 million – $10 million 0.02% 10.53%
Over $10 million 0.01% 16.22%

Source: Internal Revenue Service Data Book, 2014

2. People who file estate tax returns for assets worth more than $5 million

Likewise, a huge estate tax return could raise some eyebrows at the IRS. Overall, 8.5% of estate tax returns were singled out for special scrutiny in 2014, way more than the 0.9% of individual tax returns.

And the bigger the estate, the more likely the IRS flagged the return for an audit. More than 21% of estate tax returns with assets between $5 million and $10 million were audited in 2014, and 27% of returns with assets worth over $10 million were audited.

However, estate tax returns are pretty rare: The IRS received 33,719 in 2013, and only 3,359 of those were for estates worth $10 million or more.

3. People who file international returns

If you’re mailing your return from the Cayman Islands, you can bet that the IRS is onto you. Over the past several years, the IRS has increased scrutiny of international returns.

“On the individual front, we have made putting a big dent in offshore tax evasion a major priority,” Shulman told the American Institute of Certified Public Accountants in 2012. “We view offshore tax evasion as an issue of fundamental fairness. Wealthy people who unlawfully hide their money offshore aren’t paying the taxes they owe, while schoolteachers, firefighters and other ordinary citizens who play by the rules are forced to pick up the slack and foot the bill.”

In 2014, the IRS audited 4.8% of international returns.

But there’s a cost to fewer audits

Law-abiding citizens have little reason to celebrate the limited number of tax audits. Koskinen expects that, thanks to federal budget cuts, the IRS will lose out on at least $2 billion in revenue that auditors would otherwise be able to collect. Plus, sometimes when the government takes a second look at your return, you get more money back: In 2014, the IRS decided 38,029 individual filers had paid too much in taxes and sent them additional refunds.

Related:

MONEY Taxes

450 Billion Reasons Why John Oliver Is Right About the IRS

Last Week Tonight With John Oliver
Eric Liebowitz—HBO/Courtesy Everett Collection

The Last Week Tonight host argues for increasing the IRS's budget. Here's why doing so could save taxpayers money in the long run.

On last night’s Last Week Tonight, John Oliver made news with an argument he acknowledged many viewers might find hard to believe: The Internal Revenue Service, the most maligned of all government organizations, needs more money, not less.

The whole segment is worth watching. (Mostly safe for work, depending on where you work. Maybe use headphones.) But the key point is that the IRS has had its funding cut by about 10% in the last five years, and by nearly 20% if you adjust for inflation. In that same time period, the IRS has also significantly cut enforcement staff.

 

So what if enforcement is weaker? It may mean more people are getting away with paying less than they owe. Every five years, the IRS calculates what’s known as the “tax gap”—the amount of taxes owed minus what is actually paid—and the results are a pretty ugly. The most recent report, produced in 2012 for tax year 2006, puts the tax gap at $450 billion dollars. (The gap shrinks to “only” $385 billion once you take into account late payments and money recouped through enforcement.) Think of it like this: Every dollar someone gets out of paying ultimately has to be made up by the rest of us taxpayers, in the form of higher taxes.

It’s important to note that closing this entire tax gap is likely impossible. The U.S. tax system is build on voluntary compliance, and a very large portion of the government’s losses come from people underreporting their incomes from sources that are hard to verify, such as a self-employed person understating profits.

Detractors have argued the IRS shouldn’t get more funding until it improves its performance. The agency has been rocked by allegations that it targeted conservative non-profit groups in delaying their tax exempt status, and Republicans, like Senator Rob Portman, still harbor deep mistrust toward the agency.

That said, the Treasury Department estimates a $1 investment in the IRS’s enforcement ability returns $6 in revenue, and that’s not counting the deterrent effect on potential cheats, which Treasury says may be three times higher. Finding a way to close just a small portion of the tax gap would save the public huge amounts of money.

Read Next: 3 Ideas That Could Make the Tax System Work Better for Everyone

TIME Television

Watch John Oliver Get Michael Bolton to Sing an Ode to the IRS

Spare the IRS your ire

Tax day is nigh and John Oliver used his Last Week Tonight platform to urge taxpayers not to blame the IRS for their tax day woes — and instead save that ire for Congress.

“The fact is, blaming the IRS because you hate paying your taxes is like slapping the checkout clerk because the price of eggs has gone up,” said Oliver. He noted that if people are angry about the amount of tax they pay, they should blame Congress, who are also responsible for setting the tax rate and for making frequent, confusing changes in the tax code.

Oliver believes that the IRS is unfairly vilified by taxpayers, and their status as the universal scapegoat, gives Congress leeway to cut the agency’s budget, which results in fewer services and longer lines. To encourage people to spare the IRS, Oliver conscripted Michael Bolton to sing a stirring ode to the most maligned agency in the U.S. government.

Read next: Here’s What to Do If You Can’t Finish Your Taxes On Time

Listen to the most important stories of the day.

MONEY Taxes

Here’s What to Do If You Can’t Finish Your Taxes On Time

working father with two kids
Paul Bradbury—Getty Images Too busy to finish up your taxes in the next week? No worries.

The April 15 tax-filing deadline is here. If you're not going to be done by Wednesday night, relax. You have options.

Tax Day is upon us. If you haven’t pulled your documents together or made real progress on your tax return yet, filing for an extension by April 15 sounds like a pretty good idea. That’s what about 12 million people do each year, according to the IRS.

Getting more time isn’t as simple as it sounds. Here are seven things you should know if you can’t make the deadline.

1. You still have to act by April 15. Anyone can file for an automatic extension, but the paperwork is still due on April 15. Filling out Form 4868 will give you another six months to finish, though you can file your taxes any time before October 15. You can file for an extension for free through IRS Free File. Check with your state to see if you need to file a separate application for an extension.

2. If you owe money, you have to pay up. Just because you’re getting an extension, you don’t get more time to pay your taxes. You’ll need to fill out enough of your tax return to come up with a rough estimate of what you owe. Use a tax estimator like the one the IRS provides. Fail to pay, and you’ll be hit with a penalty of 0.5% to 1% of what you owe for each month or part of a month your bill is outstanding.

3. Failing to file is worse than failing to pay. If you simply ignore tax day and don’t file or apply for an extension—and you owe taxes—you’ll be hit with a failure-to-file penalty, which is usually 5% of the unpaid taxes for each month or part of a month your return is late, up to 25% of your bill.

4. Your bank may be kinder than Uncle Sam. You may want to pay your taxes with a credit card if you don’t have the cash on hand. The interest and fees you’ll pay with plastic (roughly 2% of your tax bill) may be less than the interest and penalties you’d face on a late tax payment.

5. You may not need an extension. If you’re asking for an extension just because can’t come up with the money (not because you don’t have your paperwork in order), you’re better of filing your return and paying what you can. You can request a short extension of 60 to 120 days to pay. You will still pay penalties and interest, but at a lower rate.

The IRS also offers installment agreements when you can’t pay your taxes on time. You’ll have to pay a fee to set up the plan—use Form 9465-FS—and you’ll be billed monthly. The IRS must approve the plan, and you can’t stretch out the payments for more than three years.

6. If you are owed a refund, you won’t be penalized for not filing. Of course, you won’t get your refund until you file your return. So why let Uncle Sam hold on to your money any longer than necessary?

7. If you’re a chronic procrastinator, the IRS won’t issue your refund. If you don’t do your taxes three years running, even if you’re owed a refund, the IRS will keep your money.

Related: Watch for the Obamacare tax scam targeting last-minute filers

MONEY Taxes

Is Your Tax Refund Too Big?

massive amount of cash in pocket
William Howell—iStock

Getting a big check from the IRS is exciting, but it might not be the best for your long-term financial health.

Taxpayers getting back money from the government this year have received an average refund of $2,893 so far, according to March 26 data from the Internal Revenue Service. That’s a nice bump up in cash flow, and a lot of people look forward to it as a chance to splurge, pay down debt or add to their savings.

But those people could have had that money all year, had they withheld less of their paycheck. Getting a big refund means you essentially gave the government an interest-free loan, when you could have put the money in a savings or retirement account to earn interest. You may see that money as a windfall, but you should really see it as the government making good on a year-long IOU.

There’s no right or wrong answer to how much of a refund you should aim to get, because it’s very much a matter of personal preference, and it can also be tricky to estimate. No matter how you choose to deal with your taxes, it’s worthwhile to regularly evaluate your withholdings. Here’s why.

Your Life Changes

About 82% of taxpayers receive refunds, but even if you’ve consistently gotten one, a significant life change may affect how much you receive or if you get one at all. Marriage, divorce, the birth or adoption of a child, or a drastic income change should trigger a review of how much you have withheld from your paycheck.

You Should Look for Patterns

Beyond re-evaluating your tax situation in the wake of a noteworthy life event, your tax-filing history will give you a good idea of when you should consider changing how much is withheld from your paycheck. It can be a difficult thing to estimate, because as much as you want may want to avoid owing the Internal Revenue Service in April, getting too much in return may not be the best for your long-term financial health.

“A good place to be is owing a little bit or getting a little bit back,” said Elliott Freirich, a certified public accountant in Chicago. But where exactly is that “good place”? “There’s no right answer. It’s a gray area, but I would tell people if they could kind of keep (their refund) under $1,000. … It’s not like it would go away and they would never have it if they reduce their withholding.”

Know Your Own Saving/Spending Habits

Some people feel that way — that they wouldn’t be disciplined enough to set aside the money they would otherwise get from a large refund.

“It’s sort of like forced savings,” said Jorie Johnson, a certified financial planner in New Jersey. She said she suggests her clients re-evaluate their withholding if their refund exceeds $5,000. “I encourage them to use half of their refund toward their IRA, if they haven’t already maxed it out, and the other half on themselves, as a reward — that’s assuming they don’t have any debt.”

Consider the big picture: Do you look forward to a large tax refund but struggle to meet your savings goals on a monthly basis? If you’re trying to work your way out of debt or regularly find yourself financing your lifestyle while also getting a large refund check every tax season, that’s a sign you need to revisit your withholding (you might need to re-evaluate your spending habits, too).

Remember that withholding is just an estimate of what you’ll owe, and it may take you a few years of consistent tax outcomes to confidently adjust that estimate to meet your tax needs without owing or receiving a large sum come tax time.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Taxes

What It Says About the Economy that People Are Saving their Tax Refunds

saving tax refund
Rene Mansi—Getty Images

It's not necessarily good news that so many are banking their checks from Uncle Sam

This spring, Jes Norman is looking forward to handing her personal financial advisor a bigger-than-normal check: her tax refund.

“I’m investing because I hadn’t in prior years,” says Norman, 28, a project manager for an electronic medical record company. “My tax return is the easiest deposit to give since it’s ‘bonus’ money.”

After a serious medical illness plunged her in debt four years ago, the Rockford, Ill. resident was forced to spend her available cash paying off medical bills. Now her finances are stable enough for her to save her refund.

Retailers looking forward to tax refund season hope Americans with extra cash might be quick to throw open wallets and splurge. But surveys show a higher percentage of adults will be making like Norman this year, and socking away at least part of their refunds.

Fewer Plan to Splurge

tax refunds economy

The average tax refund is up 0.7% this year, to $2,893. And the National Retail Federation’s survey last month of over 6,000 adults across income brackets and regions showed almost half of consumers expecting a refund are planning to save some of what they get back from Uncle Sam.

That is the highest percentage since the trade association started conducting the survey 12 years ago.

Thirty-nine percent of consumers also planned to pay down debt with their refund.

Only 10% planned to make a “splurge” purchase and a quarter said they would use at least some of the refund for living expenses.

A smaller survey by Bankrate.com showed consumers who planned to spend their refund dropped from 7% in 2010 to only 3% this spring. Meanwhile those who planned to save or pay down debt grew from 58% five years ago to 67% today.

Blame the Recession Hangover

This savings trend has been taking off on a national scale since the recession, says Mark Zandi, chief economist for Moody’s Analytics. Before the recession, the savings rate hovered between 2.5 and 3%. Now it’s up to 5.5% and has been on the increase for the last three months.

“American consumers remain cautious,” Zandi said. “I think, in general, consumers are not letting loose.”

Other economic indicators seem to back this up.

Despite strong job growth, several months of increases in personal income and lower gas prices, retail sales dropped 0.6% last month—despite forecasts for an increase of 0.3%. This is the first time since 2012 they have dropped for three consecutive months.

Personal consumption also declined more than expected: -0.2% and -0.3% over the past two months before adjustments for inflation.

And the annualized pace of auto sales fell in February to 16.2 million from January’s 16.6.

Meanwhile consumer sentiment has been slipping during tax season. The index peaked at an 11- year high in January at 98.1 but fell in February to 95.4 and to 91.2 in March’s preliminary forecast.

New York tax professional Alisa Martin, who has clients ranging from low-income freelancers to high-income professionals, also says she has seen a new awareness from clients to save and pay down debt since the recession.

“People are more concerned about savings,” said Martin. “Even people that were good financially before the crash, it dipped into a lot of their savings. They saw accounts really go down. Now they’re trying to get things built back up.”

The NRF survey found that Millennials were even more likely than the general population to save (55% vs. 47%)—which may be owed to their having come of age in tough economic times.

“Perhaps having learned a few financial lessons from their parents during the economic downturn, it appears that Millennials are looking for ways to get ahead,” explains Pam Goodfellow, a director for Prosper Insights and Analytics, the company that administered the poll. “Less likely to be saddled with mortgages and accumulated debt, tax refunds represent the perfect opportunity for younger consumers to invest in their future.”

 

Hear why Millennials are saving more of their refunds

 

Aside from these national trends, Americans may also be affected by more programs promoting savings this tax season. H&R Block, one of the country’s largest tax preparers, announced a new 3-year program to promote savings called “Savings at Tax Time.” The campaign, a partnership with the Consumer Financial Protection Bureau, will encourage clients to save when they come in to get their taxes done.

The bureau also runs a similar campaign at thousands of government-supported community tax preparation sites for low-income Americans.

Retailers Will Lose… But Maybe Not as Much as Expected

The loss in potential spending by Americans is significant. Last year, the IRS handed Americans a total of nearly $65 billion dollars in refund checks.

But even with the increased push toward savings, tax refund season won’t be a total bust for retailers.

“We do know that there are significant spending responses among households when their tax refunds arrive,” said Jonathan Parker, a finance professor at MIT who has studied how Americans tend to spend money they get from government rebates and refunds.

Parker said many studies have shown that people tend to spend a “significant share” of these types of payments—even those who say they’ll save it.

More on taxes from Money 101:

How can I reduce my tax bill?

How do you know if it makes sense to itemize?

What if I need more time to file my taxes?

MONEY Taxes

6 Red Flags That Can Get You Audited

red flag push pin
Sergey Galushko—iStock

These six red flags that can trigger questions from the IRS, or even a full-blown tax audit.

There’s nothing quite as heart-stopping as a notice from the IRS. Sometimes it’s to raise a question about an item on your return; other times you may get a notice that you owe money. If you’re really unlucky, you may find out the IRS is auditing your return. Fortunately, about 80% of audits are simply “correspondence audits,” meaning the IRS is “asking for documentation or showing an adjustment made based on information received,” says Lisa Greene-Lewis, CPA and TurboTax tax expert.

But no matter how innocuous, the only time most people want to get mail from the IRS is when they are waiting for a refund check. Here are six red flags that can trigger questions from the IRS, or even a full-blown tax audit.

1. Not Claiming Income

You know all those W-2s and 1099 forms you get in January and February? The IRS gets copies of those forms, too, and they with match them with the income you report on your tax return. “Taxpayers must always make sure that the income on Form W-2 and Form 1099 match the reported income on their returns,” says Stephen F. Lovell, president of Lovell Wealth Legacy.

You may not hear from the IRS about this kind of problem right away. I once received a notice from the IRS two years after I failed to report income from a 1099 form I never received. (I’d moved, and I assume it went to my old address.) And we’ve heard from taxpayers who’ve received notices from the IRS telling them they owe taxes because they failed to report income from canceled debt (reported on Form 1099-C) several years after the fact. If you’ve moved in the past few years it’s possible the IRS got a form reporting income but you didn’t. If that’s a concern, order a wage and income transcript from the IRS for the years you are concerned about. (Note: You likely will not be able to get your transcript for the current tax year until about 3-6 weeks after you filed your return and paid what you owe.)

2. Daring Deductions

“If your deduction claims are way off, you’re likely to get questioned,” says Kay Bell, tax blogger at Don’t Mess with Taxes. What constitutes “way off?” The IRS can compare tax return data to averages, explains Bell. “Known as the Discriminant Information Function, or DIF, this computer-scoring system looks at average deduction amounts.” That doesn’t mean you shouldn’t take legitimate deductions; just be prepared to back them up.

3. Business Losses

Self-employed, or have a side business? If you file Schedule C, the form that reports business income or loss, understand that a loss could cause the IRS to look more closely. “If you show a loss, the IRS’s question is, “Is this a real business or just a hobby?” warns Dan Pilla, author of How to Win Your Tax Audit. The IRS will look at whether expenses were “incurred for the intent of earning income and not just pleasure” as in a hobby, he says. Making a profit doesn’t automatically ensure that expenses won’t be scrutinized. You’ll need to be able to demonstrate a legitimate business purpose if questioned.

4. Questionable Charitable Deductions

Did you donate an old car or boat? If the value of a single item you donate is $5,000 or more you’ll need to get an appraisal. Cleaning out closets and donating clothing or other household items to charity? “It’s also a good idea to take pictures of donated non-cash items,” says Greene-Lewis. Of course, there’s an app for that: TurboTax ItsDeductible can help you figure out how to value those items and track your donations. I use it myself and find it helpful for figuring out how much that purse or stack of books I’m giving to my local Goodwill might be worth.

Also remember that in order to be deductible, charitable gifts must be made to a qualified organization and you can only deduct the amount that exceeds the value of any benefits you received (ticket to a concert or dinner at a restaurant, for example). The IRS also warns that if you want to deduct contributions of “cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization” that satisfies IRS requirements. More details on charitable deductions can be found on the IRS website.

5. Failing to Properly Pay Household Employees

If you employ a nanny, housekeeper or an aide to help care for an elderly member of your family, you may run into any of three common tax traps, warns Tom Breedlove, Care.com Home Pay Household Tax Expert. The first is paying them under the table. If your household help earns $1,900 or more in a year, you must have taxes withheld from their pay, and you — as the employer — must file and pay state and federal taxes. While you may have an arrangement with your caregiver to pay them in cash, if they try to collect unemployment benefits, your off-the-record arrangement could backfire.

In addition, Breedlove warns that “household employees must be paid overtime for hours over 40 worked in a seven-day workweek.” Again, this could come up if the employee files a wage dispute. “On top of this, families could be audited, which can result in having to amend previous tax returns and pay additional taxes on the wages that were incorrectly reported,” he says. And lest you think that just giving the employee a 1099 instead of W-2 form solves the problem, think again. “The IRS equates this practice to tax evasion,” he says.

6. You and Your Ex Don’t Match Up

Are you paying alimony? Collecting alimony? Then make sure the amounts you and your ex report match up. “Although divorced, ex-marrieds must make sure that their respective returns mirror each other,” says Lovell.

Similarly, if you have children, only one of you gets to claim child-related tax benefits such as the child care tax credit, the dependency exemption, and the head of household filing status. Who gets to claim what will depend in large part who is considered the custodial parent. You’ll find more details in IRS Publication 501.

Again, don’t let the fear of an audit stop you from claiming legitimate tax deductions. And keep in mind that when it comes to any kind of audit, TurboTax says that less than 1% of tax returns reporting incomes under $200,000 get audited.

An audit in and of itself does not affect your credit: It’s only when you owe the IRS money you can’t pay right away that unpaid taxes may affect your credit. That’s because the IRS may file a Notice of Federal Tax Lien which will create a credit-damaging tax lien on your credit reports. (You can check your free credit report summary on Credit.com to see if there are any tax items that are impacting your credit.) And even then, if you can work out a payment plan with the IRS you can often get the tax lien removed from your credit reports while you pay off your tax bill.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Taxes

3 Things the Government Could Do to Make Tax Filing Less Painful

Uncle Sam with life preserver
Peter Gridley—Getty Images

While filling out a 1040 form is never going to be fun, tax time is actually much harder than it has to be. Here are three common-sense ways the feds could make doing your taxes less burdensome.

It’s no secret tax season isn’t one of the more enjoyable parts of the year (even for accountants). To a certain extent, that’s understandable. Filing a return means scrounging through receipts, rounding up documents, and depending on your financial situation, forking over more money to Uncle Sam.

But while filling out a 1040 form is never going to be fun, tax time is actually much harder than it has to be. That’s mostly thanks to the federal government, which has been reluctant to apply multiple common-sense policies that would make everybody’s April a lot nicer. Here are three ways the feds could make taxes less burdensome:

1. Let the IRS Do People’s Taxes for Them

Imagine a world where, instead of filing your own taxes, the government estimates your taxes and refund based on information it already has from employers, banks, and other institutions, and then gives you a review copy to look over. If everything is accurate, the individual taxpayer can simply accept that result and—poof!—taxes are done.

This system, called “return-free filing,” is no fantasy. It’s actually the status quo in European countries like Iceland, Sweden, Spain, and is even available to residents of California.

Why haven’t you heard of it? One reason is that Intuit (the maker of TurboTax) and other firms that provide tax preparation services have lobbied against return-free filing. An investigation by ProPublica found that Intuit alone spent $11.5 million on federal lobbying over a five-year period.

Not all that money necessarily went to fighting this specific issue, but Intuit has listed its opposition to “IRS government tax preparation” on the company’s lobbying disclosure form. Intuit has also acknowledged that return-free filing poses a risk to its business on its annual 10k filing with the Securities and Exchange Commission.

Lobbying aside, return-free filing’s opponents do have some valid criticisms. Asking more of the IRS can always be a dicey proposition, especially when its funding is repeatedly slashed (more on that in a second). The system could also be more burdensome for employers, who would need to give the government employee information sooner than they already do. There’s also the fact that the government can’t estimate particularly complicated returns; anyone looking to itemize, for example, is out of luck.

That said, return-free filing would still make life significantly easier for a huge number of taxpayers. According to Roberton Williams of the Tax Policy Center, over 23 million returns in 2012 were filed using the simplest tax form, 1040EZ, and the IRS should be able to pre-calculate those returns with “nearly perfect accuracy.” Other forms are more complicated, but some estimates suggest close to half of all taxpayers could benefit from a return-free policy.

According to Dennis J. Ventry Jr., a professor at U.C. Davis School of Law specializing in tax policy, those Americans who have been able to test out return-free filing seem to like it. A lot.

He recalls that when California first allowed return-free filing through a pilot project known as “Ready Return,” users of the program became instant fans. “It was amazing,” says Ventry, who remembers the program’s website being flooded with positive comments. “People were like, ‘Oh my god, this is the best program the government ever offered.'”

2. Stop Return Fraud by Having Employers File Tax Information Earlier

If you’ve never had your tax refund stolen, count yourself lucky. Every year, criminals steal billions of dollars from the government—and citizens—by filing fraudulent tax documents using stolen identity information and absconding with the refund.

According to the Treasury Inspector General, 1.6 million taxpayers were hit by tax identity theft in the first half of 2013, resulting in the theft of $5.8 billion dollars in refund money. Return fraud was so prevalent last year that Turbotax temporarily stopped processing state tax returns while it implemented additional anti-theft measures.

But as pervasive as return fraud is, it’s not hard to figure out why the system is vulnerable. As of now, citizens file their taxes in April, and the IRS is required to send out refunds quickly, generally within three weeks. Yet employers don’t have to send their employees’ tax information to the government until months after it’s given to workers, and it doesn’t actually reach the IRS until July.

That means the government can’t cross-reference the information your employer provided with the tax return filed in your name until long after your refund has been sent out. By the time fraud is discovered, it’s too late.

As Vox‘s Timothy B. Lee points out, Nina Olson, the National Taxpayer Advocate, has spent years advocating for a simple solution to this problem: make employers file tax information earlier, and then match that information with individual returns before releasing any money. “Upfront matching would reduce the incidence of tax fraud, identity theft, and inadvertent errors while also providing significant taxpayer service,” wrote Olson in testimony presented to the Senate Committee on Finance.

Unfortunately, for this plan to work, Congress needs to pass a law that would bump up employer reporting deadlines, and so far, that hasn’t happened. Until it does, refund fraud will be easier than it should be.

Read next: How To Get Your Money Back If Your Tax Refund Is Stolen

3. Give the IRS More Money

It might sound weird to complain that the tax man isn’t getting enough money, but the truth is the IRS is deeply underfunded, and the people who pay the price are, ironically, honest citizens.

During the last five years, the IRS has had its budget slashed by $1.25 billion dollars, representing a 10% decrease in resources.

Over the same time period, the number of total tax returns increased by about 11%. As the graph below shows, that’s led to a serious decline in service.

Source: National Taxpayer Advocate

Before tax season began, Olson predicted the IRS would only be able to answer half of an estimated 100 million taxpayers who call the IRS seeking assistance. Those who do get through might have to wait as long as 30 minutes for help, and will only be able to ask questions on a limited number of issues. “If these projections prove accurate,” Olson noted, “taxpayers in 2015 will receive the worst levels of service since the IRS implemented its current performance measures in 2001.” (Here’s how to get help when the IRS won’t answer your call.)

The upshot of this is that honest taxpayers seeking help on their returns will go through hell trying to get answers, while anyone trying to cheat on their taxes will have an easier time. In a January email to employees, IRS Commissioner John Koskinen wrote that the agency’s diminished enforcement capacity would cost the government $2 billion in revenue.

Next time you wonder why taxes are so annoying, remember: it doesn’t have to be this way.

MONEY Taxes

For Some Retirees, April 1 is a Crucial Tax Deadline

If you recently reached your 70s and aren't yet drawing money from your tax-deferred retirement accounts, you need to act fast.

For anyone who turned 70½ last year and has an individual retirement account, April 15 isn’t the only tax deadline you need to pay attention to this time of year.

With a traditional IRA, you must begin taking money out of your account after age 70½—what’s known as a required minimum distribution (RMD). And you must take your first RMD by April 1 of the year after you turn 70½. After that, the annual RMD deadline is December 31. After years of tax-deferred growth, you’ll face income taxes on your IRA withdrawals.

Figuring out your RMD, which is based on your account balance and life expectancy, can be tricky. Your brokerage or fund company can help, or you can use these IRS worksheets to calculate your minimum withdrawal.

Failure to pull out any or enough money triggers a hefty penalty equal to 50% of the amount you should have withdrawn. Despite the penalty, a fair number of people miss the RMD deadline.

A 2010 report by the Treasury Inspector General estimated that every year as many as 250,000 IRA owners miss the deadline for their first or annual RMD, failing to take distributions totaling some $350 million. That generates potential tax penalties of $175 million.

The rules are a bit different with a 401(k). If you’re still working for the company that sponsors your plan, you can waive this distribution rule until you quit. Otherwise, RMDs apply.

“It’s becoming increasingly common for folks to stay in the workforce after traditional retirement age,” says Andrew Meadows of Ubiquity Retirement + Savings, a web-based retirement plan provider specializing in small businesses. “If you’re still working you can leave the money in your 401(k) and let compound interest continue to do its work,” says Meadows.

What’s more, with a Roth IRA you’re exempt from RMD rules. Your money can grow tax-free indefinitely.

If you are in the fortunate position of not needing the income from your IRA, you can’t skip your RMD or avoid income taxes. You may want to reinvest the money, gift it, or donate the funds to charity, though a law that allowed you to donate money directly from an IRA expired last year and has not yet been renewed. Another option is to convert some of the money to a Roth IRA. You’ll owe income taxes on the conversion, but never face RMDs again.
Whatever you do, if you or someone you know is 70-plus, don’t miss the April 1 deadline. There’s no reason to give Uncle Sam more than you owe.

 

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