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The Hidden Economic Burden of Federal Tax Debt

Every political cycle, a new candidate comes out promising tax reform and changes to the tax code to help them get elected. Most of these candidates never follow through with their promises, or if they do, the bill changes so much in Congress that it barely looks like the original plan. As the 2016 presidential campaign revs up, the candidates are releasing their tax plans. They have also voiced opinions on other ways to stimulate the economy, including forgiving student loans and initiating free higher education. However, one area that continually remains a silent economic burden untouched by the candidates is the millions of people who owe tens to hundreds of thousands in federal tax debt.

The Economic Problem of Compliance

The US has an overly complicated tax code, which has led to significant costs to the individual and the government in order to remain in compliance. One study by Mercatus Center found that between $67 and $378 billion are spent every year just for accounting related to filing taxes. Additionally, Americans spent a grand total of over 6 billion hours in 2011 ensuring that they remain in compliance with the tax code, which is the equivalent of a workforce of 3.4 million, or the combined employees of Wal-Mart, IBM, Target, and McDonalds. This time, money, and resources could be spent in other things, which results in stalling economic growth by between $148 billion to $609 billion every year.

Additionally, every year, there is a significant tax gap, which is the difference between the amount that is legally due to the government in taxes and the amount the IRS actually receives. Although around 86 percent of those who pay income tax do so voluntarily and on time, the gap was $452 billion in 2012. Although people do not enjoy paying taxes, this money does go towards funding federal programs, and the tax gap can affect the country’s economy, including increasing everyone’s tax burden to cover what is not paid.

This is the economic burden that most politicians look to solve when they create a new tax plan. However, there is another economic burden regarding tax compliance: that of federal tax debt.

The Tax Debt Effect

Millions of taxpayers cannot pay their taxes and subsequently owe a significant amount of money to the IRS. This may be due to accidently under-reporting, which is discovered during an audit, leading to the tax payer having to pay the difference plus potential penalties and interest. Other people forget to or purposely do not file a tax return, leading to a significantly tax burden due to interest, penalties, and inaccurate tax estimates by the IRS. Many of these taxpayers hit with a bill cannot afford to pay it and find themselves in even further economic trouble, especially if they face collective action in the form of wage garnishment, liens, or levies. This can create a trickle-down effect that ends up hurting the nation’s economy.

These people receive letters from the IRS stating they owe money, often in the tens of thousands of dollar range. They cannot pay it, so they do nothing. This leads to the IRS taking action. When this happens, the person who already has limited funds finds their finances hurting even more. For example, a person whose wages are garnished by the IRS may find themselves trying to live on roughly $900 a month for a single person. (The amount a taxpayer is left with is based on the IRS’ assessment of what is necessary for basic living expenses, and the person is left with the same amount no matter their income.) However, most places in the country have rent costs much higher than $900. Plus, a person has to find a way to pay for groceries, gas, and other necessities. The wage garnishment leaves them with no money for anything else, and they may not even have enough on which to live. Other collective action such as liens and levies can also greatly reduce a person’s financial freedom.

The Economic Consequences

Not only do these people not have disposable income or the funds to buy big-ticket items, such as houses, to help keep the economy healthy, but they also may start to find ways to avoid the IRS, which in turn leads to further economic consequences. In extreme cases, they may quit their job and start working cash jobs under the table and not report it to the IRS, leading to a loss of revenue. More likely, they will start to leave a nomadic lifestyle, going from job to job and apartment to apartment trying to escape further collection action from the IRS. There are many other scenarios that scared taxpayers with no money may decide to enact just so they can have money to eat or live a normal lifestyle.

For many of these taxpayers, they are not trying to get away with not paying taxes on millions of dollars; most of them barely have enough to live a comfortable lifestyle and are simply trying to hold onto it. The more people who live with this burden, the larger effect it has on the country’s economy. Just as those with significant student loan debt have a hard time financing houses and cars and spending money to help stimulate the economy, those who are burdened with a significant tax debt provide no economic support to the country and may even find themselves becoming a burden.

Helping Those Who Owe Money

In 2012, the IRS initiated a Fresh Start program in order to tackle some of the economic burden of those who owe a tax debt. This program included actions to make it easier for people to be in compliance. It included:

  • Increasing the amount of debt for which a lien is issued to reduce the number of liens
  • Helping taxpayers to remove the lien once they have paid their debt
  • Removing liens when a taxpayer negotiates an Installment Agreement
  • Making it easier to set up an Installment Agreement
  • Expanding the Offer in Compromise program to include more taxpayers

This initiative helped to expand programs already in place to help those with a tax debt find a way to pay it off without putting them in further financial debt. However, many taxpayers have no idea that these tax relief programs exist. Furthermore, the programs often work as simply a band-aid to help a person not lose their home while still not allowing them to live a reasonably comfortable lifestyle. When the politicians discuss ways to create tax reform in this country alongside how to help with the burden of the student loan debt, they should also start to discuss ways to further help those burdened by massive tax debt as a way to also help strengthen the economy.

If you are burdened with tax debt and are looking for relief, contact Fidelity Tax Relief. Our tax professionals will investigate your situation and find the best solution for you, whether it is to negotiate an Offer in Compromise, set up an Installment Agreement, or apply for another IRS tax debt relief program. There is a way to find freedom from your debt while remaining compliant so that you can have more disposable income from your paycheck.

Time is running out!​

When you owe money on your federal taxes, one of the common collection actions taken is IRS tax garnishment, typically on your wages or salary. Wage garnishment can leave a person with very little money on which to live. 

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