BY GREG MERMEL, C.P.A.
Many of you have started assembling your 2002 income and deduction data so that you can easily file before the April 15, 2003 deadline. Deadlines breed anxiety in many people, particularly if the deadline involves an uninteresting task imposed on you.
How much more anxious, then, are those that I have told they absolutely, positively must finish their 1999 income taxes before April 15, 2003?
That’s right, I said 1999.
Half Empty or Half Full
Some people look at the daunting complexity of the U.S. tax system and are amazed at how few people just give up and do not file their tax returns when due. Others are equally amazed to learn that there are any people out there sufficiently brave or sufficiently disorganized or sufficiently inept to let it go.
Based on the information it has (such copies of W-2 and 1099 forms), the Internal Revenue Service estimates that 1.5 million taxpayers who have not filed 1999 tax returns have refunds due totaling $2.5 billion. They estimate the median unclaimed refund at $511.
My view? I think that’s a lot, being about 1.2 percent of the number of people who did file 1999 tax returns. Remember, that 1.5 million is only those who the IRS thinks are due refunds, using worst-case assumptions: single, no dependents, no deductions. The real number of people who should have filed, and have not, is bigger. These estimates exclude other delinquent taxpayers who would owe money under those worst-case assumptions, but would be due refunds after taking their real situation and deductions into account. Beyond that, of course, are those who know they would owe money and are just not dealing with it.
When delinquent taxpayers find their way to my office–and they often do–I am often stuck with the painful task of telling them they could have had a refund, but they have waited too long. There is a time limit within which you must file to receive the refund.
Which brings us back to 1999. The time limit for claiming a refund is three years from the due date of the return. 1999 returns were due on April 15, 2000; three years from that is April 15, 2003. Wait even a day later to file your 1999 return, and you will receive no refund. There is one exception: If you filed for an extension, the time limit for claiming a refund expires three years from the extended due date. That means Aug. 15, 2003 or Oct. 15, 2003, depending on whether or not you got both a first and second extension. Most people who let the deadline slide, however, do not file extensions.
Cruelty, Asymmetry and Irony
The three-year rule applies only to claiming money owed you by the government. If you owe them money, they can chase you for 10 years, sometimes more in special circumstances. And that time runs not from the due date of the return, but from the later of (a) the due date or (b) when the return was actually filed. So if you made your living in 1978 selling pot outside Grateful Dead concerts and did not file a tax return, you cannot be prosecuted for dealing drugs. That statute of limitations has expired. The IRS can still come after you, though the likelihood of the IRS actually doing that is close to nil.
Many of those 1.5 million taxpayers who are about to lose refunds were not actually required to file tax returns. Do I hear a chorus of incredulity? With certain exceptions that take about a page in the IRS instructions to form 1040 to explain, you are not required to file unless your income is more than the standard deduction and personal exemption for your filing status. For the 2002 tax year, that translates to $7,700 for a single person and $13,850 for a married couple filing jointly.
But not filing would often leave money on the table. A hypothetical married couple, with one child, earning exactly $13,850 would have a refund due them of $2,856 even if not one penny of federal tax had been withheld from their paychecks. The refund would come entirely from the earned income tax credit and the child tax credit. The money is there for the asking, but you must ask. They are not going to force you to take the money by requiring you to file.
Become Fearless
When I first meet people who have not filed tax returns for several years, I often find they are extremely fearful, actually scared to come forward, but they can rarely articulate what it is they are afraid of. It is not prosecution: that does not happen with simple failure-to-file cases. Humiliation? Being yelled at? Made to feel worthless? IRS personnel are not supposed to do that, but if it happens, so what? You have been to auditions worse than that. Beaten on the bottom of the feet with bamboo sticks? Forced to eat maggots? C’mon, this is the IRS, not prime-time television.
At worst, you will have to pay some taxes. And some penalties and interest. The penalties for late filing and late payment of taxes are a percentage of the tax due, just like interest. No tax due, no penalty.
Except, of course, for feeling like a schmoe if you let a refund escape because you just could not get around to filing.
No Deadline Here
As long as people keep asking, I’ll keep sending out free copies of my "Checklist of Potentially Deductible Items for Actors, Designers and Others in the Performing Arts." Just call or write me with your name and address.
Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.
Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.