Today the Explainer provides a roundup of questions about tax day, collected from the archives.
What happens if you don’t file your tax return?
Probably nothing, at least if you’re self-employed without any major assets or loans. There’s around a 2 percent chance of getting caught, and even if the IRS does audit you, it will probably file a tax return on your behalf and charge you a fee for the trouble. But businesses are required to file tax forms for every employee, so if you have a boss and don’t file your earnings, the IRS can spot the discrepancy. Tax evasion will also be more likely to catch up with you if you have enemies, since the IRS often snags evaders when embittered spouses or fired employees rat them out. (Read more on the risks of tax evasion.)
What if you cheat on your taxes and get caught by the IRS—are you going to end up in an orange jumpsuit on a dingy cot?
Not likely. Tax cheats end up in prison if they’re found guilty in criminal court. But the government has the time and money to make criminal charges against only a few thousand people each year. Most of the cases are tried in civil court, where a fine—not a jail sentence—is the punishment for fraud. Careless filers can also get hit with a fine: The IRS imposes a 20 percent “negligence” penalty on people who recklessly disregard the rules. (Read more on what happens to tax tricksters.)
Is there any way to have someone else pay your taxes for you?
Yes, but it has its own tax implications. Since having your tax bill covered is a form of income, you’d be liable for the taxes on the taxes that were paid on your behalf. (Read more on having someone else pay your taxes.)
Do informants have to pay taxes on the rewards they get from the government for revealing terrorists’ whereabouts?
Well, they should. Reward money has been subject to taxation since 1913, so terrorist informants do owe taxes on their earnings. Congress can choose to exempt a specific reward from being taxed, and there are other ways around the informant tax. David Kaczynski was awarded $1 million in 1998 for helping the FBI crack the case on his brother, Ted, the Unabomber, which he intended to use for legal fees and to pay the families of his brother’s victims. Despite the noble intentions, he would have been taxed on that money at the highest rate. By putting it into a fund administered by a charity, he cut down his liability. (Read more on reward money for terrorist informants.)
So terrorist informants don’t get tax breaks, but the blind do? What’s the deal with that?
It’s a result of the Revenue Act of 1943, which provided a slew of tax breaks, including a $500 deduction for the blind, meant to offset their higher cost of living. The tax break is available to anyone who can’t see better than 20/200 or who has a field of vision of less than 20 degrees. People with other medical disabilities can deduct significant medical expenses from their income, but not all conditions are as easy to diagnose as blindness. (Read more on tax breaks for the blind.)
Americans living and working abroad are often allowed to exclude tens of thousands of dollars of income and the cost of housing from their federal taxes. How come?
Because the country wants to encourage businesses to expand overseas. The Foreign Earned Income Exclusion statute, introduced in 1954, makes it more appealing for U.S. citizens to work a couple of continents away by offering them massive tax breaks. It’s a sweet deal for people sent to Third World countries, where local taxes are barely existent. But for corporate types sent to London or Paris, the high European taxes could basically negate the hometown perks. (Read more on tax breaks for Americans working abroad.)
Once you send in your forms, where does your tax check actually go?
To the Federal Reserve Bank of New York—eventually. If you pay by check or money order, that first goes to a lockbox bank that is equipped to process a whole lot of mail. From there, your check is deposited into a Treasury Department account, and the money is wired to the Federal Reserve Bank. If you file electronically, your money takes a slightly different route: It’s transferred directly from your bank account to the Electronic Federal Tax Payment System. (Read more about the path of your tax dollars.)
Taxpayers have the option of sending $3 to the Presidential Election Campaign Fund. If you check that box, do your taxes increase?
Nope. As the IRS promises on the forms, checking the box to give $3 to the fund “will not change your tax or reduce your refund.” It merely tells the government that you want $3 from the big pool of tax revenue to go toward the election campaign fund. Despite that assurance, the percentage of taxpayers who check the box has declined steadily from a high of 28.7 percent in 1981. (Back then it was only a $1 contribution; it jumped to $3 in 1993.) In 2006, only 9.1 percent checked the box. (Read more on the Presidential Election Campaign Fund.)
Campaigns aren’t the only cause benefiting from tax-form check-offs. Taxpayers filing their state taxes can also choose to give to a host of charitable organizations. How do charities get a check-off box?
By convincing state legislatures. That’s harder in some states than others. In Oregon, for instance, an organization needs 10,000 signatures and proof that it received at least $1 million in contributions and revenue the previous year. Virginia and California require that charities make a certain amount from the check-off box donations (at least $10,000 a year over three years in Virginia and more than $250,000 in the second year in California) in order to stay on the form. But too much success can get you booted: In 2000, after two funds brought in $10 million to $15 million, each over 20 years, Michigan took them off its state tax form. (Read more on how charitable organizations can get a tax-form check-off box.)
Couldn’t we just tax individuals instead of taxing both individuals and corporations?
There are several reasons why we have a corporate income tax in addition to the personal income tax. The first, called the benefit principle, is that people pay for the government services they consume. If you’re a business that benefits from legal, police, and financial protections and regulations, you’re expected to pay money to support the system. It’s also a lot easier to tax a single entity than thousands of shareholders, and eliminating the corporate tax would create bad incentives: If the government taxed only individuals, it would encourage companies to hoard the money and never pay shareholders. (Read more on the theory behind corporate taxation.)
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