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No More Than a Living
Jane Morgan is the kind of person upon whom the voluntary tax system depends. Conscientious, organized, and honest to a fault, Morgan faithfully filled out her income tax returns year after year, declaring her earnings, her deductions, and how much she owed in taxes. Like many other middle income taxpayers the Center contacted who had run-ins with the Internal Revenue Service, she was reluctant to speak on the record; her name has been changed to protect her privacy.
A self-employed consultant, Morgan has had contracts with universities and the federal government. To supplement her consulting income, she's worked as a substitute teacher in her local public school system. Like many who are determined to be their own bosses, she's never gotten rich from her efforts, but she has made a living selling her expertise to a wide variety of clients. Unlike an employee of a company who expects a weekly or biweekly paycheck, Morgan's compensation comes at irregular intervals. When she's paid for a long-term project, times are good. During other months, however, she's sometimes forced to dip into assets to pay her bills.
In 1996, while preparing her 1995 return, she was confused by the instructions explaining the penalties for early withdrawals from an Individual Retirement Account. On page 16 of the instruction book the Internal Revenue Service mailed to taxpayers, she read the following passage: "Caution: You may have to pay an additional tax if (1) you received an early distribution from your IRA and the total distribution was not rolled over or (2) you received a distribution inexcess of $150,000 or (3) you were born before July 1 st, 1924, and received less than the minimum required distribution. See instructions for line 51 for details."
Morgan, who was in her early fifties at the time, had in fact taken a distribution from her IRA in 1995. "1 knew I was supposed to declare it on my income tax that year and I did not know how I was supposed to file it," she said. "And so I called the IRS. I do my own taxes. "
Morgan wasn't alone. Every year in the months leading up to April 15, IRS employees answer phones to help taxpayers decipher the complicated jargon in the Service's instruction booklets and the myriad forms that accompany them.
In 1999, Form 1040, the basic tax return, had twenty separate lines for reporting income, eleven lines for reporting deductions, one line for reporting personal exemptions, nine lines for reporting tax credits, seven lines for reporting taxes owed, and five lines for reporting payments. There were another ten schedules, used to report business income, self-employment taxes, itemized deductions, capital gains, rental income, and farm income. The seventy-two-page instruction booklet that accompanied each tax return estimated that the total time needed to do just Form 1040 was nearly thirteen hours. The unlucky taxpayer who had to fill out every schedule (assuming such a taxpayer existed) would have required, on average, fifty-six hours and six minutes to complete all the paperwork. In addition to the schedules, there were sixteen more forms specifically referred to by the 1040, used to report moving expenses, to claim the child tax credit and the adoption tax credit, to declare foreign taxes paid, and to report "other gains or losses" not covered by the other forms.
Every taxpayer, no matter what his net worth or employment status, is required to accurately report all of his income on those forms. When the IRS or the Treasury Department describes the system as voluntary, this is what they mean: taxpayers voluntarily report all their income to the government. Of course, matters don't end there. The typical W-2 Form, which reports an employee's wage or salary income to the IRS, contains some variation of the following phrase: "This information is being furnished to the Internal Revenue Service." Form 1099, used to report interest on a savings account, dividend income, or payments made to an independent contractor, carries a similar warning. Each year, the IRS receives copies of roughly 1 billion documents, which it matches electronically, using the Social Security number on each form, to the more than 100 million tax returns submitted by individual and joint filers. The Service checks up on virtually everyone through what it calls the information returns program. If a filer of a Form 1040EZ tries to understate his income as detailed on his W-2, for example, the IRS will catch the understatement. If a filer of a 1040A omits his dividend income, the IRS receives word of it from his broker. If a filer of a regular 1040 doesn't report her interest income, the IRS is tipped off to that omission by her bank.
Even if one merely makes an honest mistake anything from a math error that inadvertently understates income to forgetting to report the interest on a checking account the IRS, if it catches the error, will charge the extra taxes plus interest. There may even be a penalty assessed, depending on the nature of the mistake and whether the Service believes there was an intent to pay less than what was owed.
Morgan ran into trouble with lines 15 (a) and 15 (b) on her 1040, on which taxpayers are supposed to declare any IRA distributions that is, money they've received from their retirement accounts, along with any penalties (additional taxes for either withdrawing money before reaching age fifty-nine or for not withdrawing enough after turning seventy). "When it came to that portion I did not know how to do it," she said. "And I called the IRS and that's where the problem started."
About two years later, on January 17, 1998, Morgan received a letter from the IRS: $1,234 was owed to the government, it said, for taxes due in 1995.