WASHINGTON - As a deep recession strips Americans of their jobs, homes and investments, the 2009 U.S. tax season promises to see a large uptick in first-time delinquent income taxpayers.
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.
As the weak economy puts job security and a steady flow of income on a slippery slope, many are wary of the U.S. tax man, tax consultants say.
With household balance sheets under pressure, more U.S. households are having trouble keeping up with their day-to-day bills and struggling to pay their taxes.
Folks are not paying their taxes because they are spending it on necessary living expenses, said Kristin Lavieri, an accountant with Weinstein & Anastasio, PC in Hamden, Connecticut.
She added that more of the self-employed, who are required to pay taxes each quarter, are likely to end up with back taxes. When there is not enough money for general operating expenses, there most definitely isn't going to be enough for quarterly estimates, Lavieri said.
Among those not self-employed, many also have to make tough decisions that could carry long-term financial consequences.
Many withdrew funds from 401k and IRA retirement savings accounts before the permitted time, unaware of the punitive taxes and penalties this would generate, said Larry Walker Jr, president of the financial and tax services firm 4-Serenity Inc in Snellville, Georgia.
Withdrawals from a retirement account before reaching the age of 59.5 are considered taxable income and generally incur an additional tax of 10 percent of the amount.
Other taxpayers did not have enough tax withheld from paychecks. As a result, they now owe taxes or will not receive the amount of refund they usually do, Walker said.
FEAR, SECRECY CAUSE MORE PROBLEMS
If we are seeing a nearly threefold increase in people who have tax problems who have never had tax issues, it shows that things are worse than people think right now, Boggs said.
But tax woes are such a taboo issue that over 40 percent of Boggs' clients have told him nobody knows about their problems, and that often includes their spouses.
When they see a tax bill that they know they can't pay, they freeze up, Boggs said. A very innocent procrastination can get you into a lot of hot water with the IRS.
The Internal Revenue Service, which collects taxes in the United States, vowed to show its gentler side this year.
We recognize the economic realities that are out there, IRS Commissioner Doug Shulman told reporters. We're available to work with people.
Critics are skeptical this will happen. The agency collects much of the $3 trillion that funds the government.
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.
National Taxpayer Advocate Nina Olson, head of an independent organization within the IRS that helps taxpayers, seemed to echo this sentiment in an annual report to Congress.
The report revealed that penalty provisions in the tax code have not been comprehensively reformed since 1989, and the complexity of the tax code is a serious problem.
An elderly woman in Austin, Texas, who asked not to be named, said her $3,000 debt to the IRS grew to around $60,000 in taxes and penalties over 16 years despite the fact that she paid off the initial debt within six months.
The 61-year-old is disabled and suffers from multiple health problems. The IRS now takes $133 each month from her Social Security disability check.
The practice is part of the agency's Federal Payment Levy Program, which allows up to 15 percent of any federal payments a delinquent taxpayer receives to go directly to the IRS until their overdue taxes are paid in full.
Olson noted that too often this automated levy system withholds Social Security payments to taxpayers with incomes below the poverty line. If these cases had been subject to human review, the report says, many would have been classified by the agency as unable to pay.
Some wealthier people are also finding themselves overwhelmed by tax burdens. America's top earners are suffering a new one-two punch, Boggs said.
Not only are America's wealthiest suffering the largest losses in nearly a century, but the IRS will be seizing what little resources they do have left in record time, he said.
Some of my rich clients are having big problems, said Lance Wallach, CEO and president of Veba Plan LLC, a financial consultancy firm. Hundreds of them do not have liquid cash to pay bills.