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Will taxpayer defaults be next?

Scott Jagow Apr 14, 2009

The IRS comes calling tomorrow, and it looks like many people won’t be able to pay what they owe. And because of the recession, more Americans may owe. The IRS is promising to be gentler this year, but the government still has to collect the money, especially considering the trillions of dollars in new spending.

From Reuters:

“Our calls are up 280 percent,” said Richard Boggs, founder and chief executive of Los Angeles-based Nationwide Tax Relief, a firm that helps delinquent taxpayers resolve tax issues.

“We’ve seen a huge rise in what we call the rookie delinquent taxpayer,” he said. “They are incredibly scared, and they have no idea what’s going to happen to them because, God bless them, they’ve never owed before.”

They owe because they maybe they’re self-employed, and they haven’t been able to keep up with their taxes each quarter. Or perhaps they’ve withdrawn money from their retirement accounts to pay the bills, and now they face tax penalties. Some people had fewer taxes taken out of their paychecks, and now they owe too.

IRS agents were given more flexibility in their collection actions, including the ability to reduce or suspend monthly payments on back taxes so those hit hard by the financial downturn are not forced to default on their tax payments.

But Boggs said IRS policies are adding to the fear Americans feel for the traditionally secretive agency while outdated guidelines make the prospect of collection action scary.

Outdated is a gross understatement. The tax code hasn’t had a serious simplification since 1986. The government just keeps piling on new layers of complexity. The National Taxpayer Advocate Nina Olson just gave a report to Congress on this. She says since the beginning of 2001, there’ve been more than 3,250 changes to the tax code – more than one a day. The tax code now has something like 3.7 million words.

She wrote about it for the Wall Street Journal:

American taxpayers deserve a simpler and less burdensome tax system. But given the near universal sentiment that the tax code is in dire need of reform, why hasn’t it happened? In my view, it’s because elected officials believe the political risks of putting forward a proposal to vastly simplify the tax code outweigh the political benefits. Each tax break has a constituency, and constituencies that stand to lose benefits tend to organize quickly to protect their interests.

Same old story. I have little doubt some people will wind up hugely indebted to the IRS during this recession, on top of the other debts they probably already have. If they don’t pay their taxes quickly, the interest will continue to mount. And based on the government’s recent initiatives, the need for tax dollars only grows.

It’s a mess. Tomorrow’s “Tea Party” protests may reveal the building anger of some Americans about the spending. I hear there will also be Tea Party crashers — people who support the President’s plan of spending our way out of recession.

But I haven’t heard much noise about demanding a tax code that people can actually understand. So what’s the point of all the yelling?

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