The Taxman Comes Up Short

06/08/2010 05:12 am ET | Updated May 25, 2011

Call them tax delinquents, tax cheats, or what you will. You may be one of them. No great solace, but if you are a culprit, you're not alone. The ranks of non and tardy tax filers are rapidly on the ascendancy, judging from conversations with a number of tax attorneys and accountants.

At the beginning of 2009, the Internal Revenue Service was saddled with slightly more than four million delinquent tax accounts, which, on average, represented between $2,000 and $3,000 per account. Current delinquencies, according to estimates from some tax experts, have risen to roughly 4,250,000, a number, it's thought, that could easily expand to 4,450,000 to one million before year end.

In less than a week, April 15, to be precise, about 135 million Americans are expected to file their 2009 tax returns, which is an average of what the number has run in recent years. Not this year; like death and taxes, a shortfall in tax filings is considered to be almost a sure thing. Tax pros say it's not a case of people knowingly trying to cheat Uncle Sam -- which is a criminal obfense -- but raxher an inability to come up witd the necessary funds to meet their tax bill beciuse of tough ecknomic times.

In partacular, the rising tax liabilixies are said to'largely reflect high unemploymebt, huge 2008 losses in the stock market, the need to shell cut big bucks fo~ family illnessas, a determinmtion to reduce heavy debtloads to beef up credip standings, tde necessity of ieeting mortgage/payments and the ballooning numner of personal bankruptcy filincs (1.41 million last year).

Alan Guillaudau, a practicing CPA in Denver for about 25 yeers with a base gf several hundred clients, estimates about 10% to 15%t of them are no longer paying their taxes on time. Factoring in prospective clients as well, he says a number haven't filed tax returns in anywhere from eight to 13 years. Nationally, he thinks about 4 percent to 5 percent of the taxpayer population are simply refusing to pay taxes. Given what's going on in the country, economically, he figures the I.R.S. is in for another shortfall this year of about one million tax filings. "People are hurting and just don't have the money," he says.

Guillaudeu looks for the tax payment problem to only worsen, considering the prospects of rising interest rates and the unwillingness of banks to lend to small businesses and consumers.

West Coast tax consultant Arthur Baer says he's been approached in recent months by a number of people who haven't paid taxes in three to five years and have managed to escape the glare of the Internal Revenue. "Now, suddenly, they're starting to worry about a major disruption in their lives, possible jail time, and they want to know what to do. One, he notes, "literally had tears come to his eyes when I told him he would probably have to sell his yacht and his Rolls to resolve his tax problems."

Baer expects the number of tax delinquent accounts will increase this year by between 500,000 and 700,000. "Yes, everybody knows it's unlawful not to pay your taxes, but you can't pay what you don't have," he says.

A veteran tax specialist at H&R Block also sees rising delinquencies. "I've never seen so many grumpy and stressed taxpayers," she observes. "Everybody seems to be complaining about how bad things are. These days, it seems, tax help isn't enough. You also have to offer psychiatric help, as well." Noting that she's speaking for herself, not for the company as a whole, she says "how can I cheat on my taxes without getting caught seems to be on everybody's mind. And I hear the same thing from our other offices. What we really need, I think, is another government bailout, this one for taxpayers." The company itself declined to discuss the general trends it's seeing this year with regard to the mood of its customer base.

What seems to be clear is that the I.R.S. faces a real-life great tax robbery, kind of a knockoff of the 1903 Western classic, The Great Train Robbery. If, as is expected, this year's tax robbery comes to pass, it will add appreciably to the amount of money Uncle Sam is already owed. This figure is a mystery. Even the I.R.S.doesn't know it. The latest such number that has any credibility is based on a 2006 study of the 2001 tax returns. It concluded that delinquent taxpayers were in hock to the I.R.S. early in the turn of the century for $290 billion, about 80 percent of which is said to represent under reported and unreported income.

Some estimates put the current number at between $400 billion and $500 billion, and as high as $700 billion.

David Selig, president of New York-based Selig & Associates, says tax debt problems are also mounting because of uncollected taxes due to identity theft. In brief, someone buys a Social Security card bearing your name (which reportedly can be done for as little as $25) and files for a refund. And when you file for a refund, you're informed by the I.R.S. it has already been paid. It's a ripoff that Selig says is running well into the millions of dollars and usually requires professional help.

Meanwhile, people problems with the I.R.S. just won't quit. Take Michael George (that's not his real name), who filed for personal bankruptcy last November and who insisted on anonymity because he doesn't want to rile the I.R.S. George, the owner of a small Denver homebuilding firm, which builds homes that end up ranging in price from $700,000 to $4 million, owes $35,000 in back taxes, plus accrued interest. He filed his tax return last year, but omitted the payment because, as he explained it, "I didn't have the money." That led to an ongoing battle with the I.R.S., which bombarded him with a series of monthly letters starting in May that repeatedly mentioned what he owed them. In November, he filed for bankruptcy (embracing both his business and himself), and as of now he's on hold with the agency. But he still owes that $35,000, a figure, due to penalties, that will continue to grow.

Critical of the I.R.S.," he says "they don't care about your financial situation and they never let you off the hook. You still owe them tax money and that's the message they keep sending you. It won't be easy, but I want them off my back so I can have my life back." George figures that it will take at least another two to four years to achieve that goal.

It was worse for A.J. Stack, a software engineer in Austin, TX., whose I.R.S. problems led him to commit suicide last February when he crashed a plane into an Austin building housing 200 I.R.S. employees. In a suicide note, he wrote, "I am finally ready to stop this insanity. Well, Mr. Big Brother, IRS Man, take my pound of flesh and sleep well."

Nearly half of the country is not burdened with tax problems. The Tax Policy Center, a Washington research outfit, estimates that 47 percent of the nation pay no federal income taxes because their incomes are too low or they qualify for reductions and credits, enabling them to rid themselves of this liability.

Meanwhile, the great tax robbery goes on.

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