Paying taxes is just about as much fun as a root canal. As such, apparently more and more people are just deciding not to do it. As the Wall Street Journal points out today, the IRS saw a 40% surge in returns that owe tax penalties between 2010 and 2015.
For reasons that aren’t clear, a growing number of people who pay taxes quarterly are getting their payments wrong and incurring penalties as a result. These taxpayers often owe estimated taxes because they have income that’s not subject to the same withholding as wages earned by employees.
According to Internal Revenue Service data, the number of filers penalized for underpaying estimated taxes rose nearly 40% between 2010 and 2015—to 10 million from 7.2 million.
In 2015, the total number of filers owing penalties may have exceeded the number filing estimated taxes, although final results aren’t out yet. This is possible because some who paid quarterly taxes may have made mistakes, and others who didn’t pay them should have.
“The data suggest that millions of people don’t understand they need to pay quarterly taxes, or at least increase their withholding to avoid penalties,” says Eric Smith, an IRS spokesman.
Estimated tax payments are Congress’s way of keeping non-wage earners from having an advantage over wage earners. More than 80% of taxpayers have wages that are typically subject to withholding, and most people pay most of their income tax this way. Thus the law requires people with other types of income to make quarterly payments based on amounts received during each period.
Taxpayers with a mixture of wage and non-wage income must either pay tax quarterly or raise their withholding to cover the non-wage income. If total payments don’t meet certain thresholds, then the taxpayer owes a penalty on the underpayment based on interest rates charged by the IRS. Currently the rate is 4%.
Of course, there's any number of reasons why people may be underpaying their tax bills. Some people, you know...those who count themselves among the 95 million 'discouraged' workers who have left the work force completely, have been forced to take on random contract work to make ends meet and simply don't understand that they have to make quarterly estimated tax payments.
That said, others understand the tax system perfectly well and are all too happy to take a 4% loan from the federal government courtesy of the Janet Yellen's accommodative interest rate policies.
Tax preparers suspect several factors are at work. For most of the period penalties grew, the interest rate was 3%—the lowest in decades, making the pain of paying them lower as well.
“Some people don’t mind paying the toll, especially if their income bunches in the last quarter, and they just owe it for a few months,” says Don Williamson, noting the decision also could explain why average penalties have declined. Mr. Williamson is a certified public accountant who heads the Kogod Tax Policy Center at American University and has a private practice.
To that end, and while unclear if it's true, Floyd Mayweather’s tax attorney, Jeffrey Morse, recently said that he was simply taking advantage of Yellen's low rates by 'deferring' his $22 million tax bill from 2015. Of course, we suspect this could be just a clever way to avoid fessing up to blowing through nearly $1 billion in career prize winnings...because that would just be embarrassing.
"If he is investing money and getting a rate of return that far exceeds what he has to pay the IRS in interest, then any smart business person is going to take advantage of that deferral."
Then again, maybe it's all much more simple and people aren't paying their taxes because they need the money to fund that $500 monthly BMW lease payment they could never afford but finance companies were all too willing to underwrite...just a thought.