The Facts on Tax Collection
Paying taxes can be a frustrating process for many individuals and businesses. However, it is essential to understand the tax collection system to avoid legal troubles and financial consequences. In this article, we will discuss tax collection procedures, including the IRS’s role, recent tax reforms, and updates to tax collection regulations.
The Role of the IRS
The Internal Revenue Service (IRS) is responsible for collecting federal taxes, including income, employment, and sales tax. The IRS also enforces tax laws and regulations. The agency has the power to initiate an audit or investigation of your tax returns, request additional documentation, and levy penalties and interest for unpaid taxes or tax debts.
The IRS uses a variety of tools and techniques to collect taxes, including lien and levy actions, wage garnishments, and seizure of assets. It is important to note that the IRS must follow specific procedures when implementing these tools, and taxpayers have specific rights and protections during the process.
The Process of Auditing Tax Returns
One of the most common ways the IRS collects taxes is through the audit process. An audit is an official review of your tax returns and financial records to ensure that you paid the right amount of taxes and filed the correct paperwork. The IRS audits a small percentage of tax returns each year, but this doesn’t mean that you shouldn’t be prepared.
There are three types of audits that the IRS can initiate: correspondence, office, and field audits. Correspondence audits are the least severe and involve resolving issues with the IRS through mail. Office and field audits involve more extensive reviews and require taxpayers to provide more detailed information.
If you receive notice of an audit, it is crucial to respond promptly and provide accurate documentation to the IRS. Typically, taxpayers have 30 days to provide requested documentation, and failure to do so can result in additional penalties and interest.
Penalties for Noncompliance
Many taxpayers mistakenly believe that they can avoid tax penalties and interest by ignoring notices from the IRS or failing to file a tax return. However, failing to comply with tax laws and regulations can result in severe consequences, including wage garnishment, seizure of assets, and imprisonment. It is essential to work with the IRS and address unpaid tax debt as soon as possible to avoid these actions.
The IRS has several penalty and interest assessments that they can levy against delinquent taxpayers. The IRS enforces the penalty and interest based on the severity of the violation and the time period in which it occurred. Some of the most common penalties include:
– Late filing penalty: This penalty applies to taxpayers that don’t file their tax return by the due date. The penalty is 5% of the unpaid taxes for each month that the tax return isn’t filed.
– Failure-to-pay penalty: If you don’t pay your taxes on time, the IRS can assess a penalty of 0.5% of the unpaid taxes for each month that the tax is not paid.
– Accuracy penalty: If your tax return has errors or misstatements, the IRS might charge you an accuracy penalty. The penalty is typically 20% of the underpaid tax.
Tax Reforms in 2021
The 2021 tax season has seen updates to the tax code and tax reform, including stimulus payments, tax credits, and tax deferrals. Some of the significant changes that could impact taxpayers include:
– Stimulus payments: As part of the CARES Act and American Rescue Plan, taxpayers received multiple rounds of stimulus payments. The payments are not taxable income and do not count towards your taxable income.
– Child Tax Credit: As of July 2021, the Child Tax Credit has been increased to $3,000 per child for children aged 6 through 17 and $3,600 per child for children under age 6. The credit is designed to help offset the cost of child care expenses for parents.
– Unemployment benefits: Unemployment insurance received in 2021 is taxable income at the federal level, but not taxable income at the state level.
Conclusion
Understanding tax collection procedures is essential for taxpayers to avoid legal troubles and financial consequences. The IRS has the power to enforce tax laws and regulations using a variety of tools and techniques, including lien and levy actions and seizure of assets. Noncompliance with tax laws can result in severe penalties and interest assessments, including wage garnishment and imprisonment.
Recent tax reforms, including stimulus payments and tax credits, could also impact taxpayers in 2021. It is crucial to stay informed about these tax changes and their potential impact on your tax situation.
When it comes to taxes, it’s always better to be proactive by filing your tax returns on time and addressing unpaid tax debt as soon as possible. Working with tax professionals, such as accountants or tax attorneys, can also help you navigate the complex world of tax collection and avoid legal and financial consequences.
Tax Collection Background:
The federal government of the United States enforces a tax levy on its citizens to fund necessary public projects such as:wars, national parks, social security, construction of roads, and Medicare.
To properly fund these projects the Internal Revenue Service (federal organization responsible for taxation) enforces taxes on the majority ofindividuals and profit-based businesses in America. The federal tax levy encompasses a variety of methods, and demands taxes to be paid on income, investments, medicare, social security, excise, sales of consumer goods, estate, and gifts. Failure to pay these varying forms of taxation will result in penalties, fines, exorbitant fees, and depending on the severity, a prison sentence.
The Internal Revenue Service was created to collect taxes on American citizens, it was established as a powerful tool used by the federal government to ensure the national levying system. Unpaid taxes represent a deficit in public funding, which in turn, mitigates the overall effectiveness of the national government. The severity of this deficit is exemplified through the dogged techniques used by the IRS to collect such unpaid taxes. In addition to charging fees and interest on unpaid returns, the IRS can seize an individuals property through the Federal Tax Lien, and subsequently sell the asset using a notice of levy.
Tax Collection Statistics:
The true taxing power of the Internal Revenue Service is revealed simply by looking at tax collection statistics found at the IRS website. In 2007 there were over 138 million tax returns in the United States. From the 138 million returns, the federal government collected 1.3 trillion dollars (gross collection) in income tax alone. The 1.3 trillion accounts for over 50% of the total funds collected by the federal government during the 2007 taxing period. These statistics reveal the importance and enormity of the individual tax levy in America.
The federal income tax in the United States is a progressive system-the more an individual makes the higher tax rate he/she will be placed under. The highest tax rate in America for instance taxes individuals at 35%. This 35% levy is only placed on individuals making over $373,650 in annual salary. Although a capitalistic society, America enforces a large obligation on the biggest wage earners-the top tax bracket routinely accounts for 60-65% of the federal income tax levy. Statistics are also crucial for understanding how these funds are re-invested into public goods and services. In 2007 for instance, the majority of the tax dollars were spent on Medicare (33%) and the U.S. military (20%.)
Outsourcing of Collection:
Uncollected federal taxes are a mounting problem in America. The IRS estimates that between $270 and $300 billion dollars go uncollected each taxing period. The uncollected taxes pose numerous negative externalities on society such as, cut-backs or deficits in regards to the supply of public goods and services. The number of tax claims that go uncollected increases and carries over to the next year. To alleviate and streamline the collection process, the IRS hired numerous debt collection agencies in 2005.
The inclusion of collection agencies was administered to pursuit small accounts to avoid carry over, allowing the IRS to focus its energies on bigger, more complicated cases. Numerous problems quickly arose however, as the agencies charged an obscene fee (25-30% of collection) and individuals complained that their private tax information was being exchanged with sketchy 3rd parties. The outsourcing method quickly died and the IRS has attempted to answer increased evasion through strengthening its agency from within.
