Life is Easier when you Pay Your Taxes

Always make sure to file a complete return on time and settle the balance due.  I don’t say this because I am a fan of taxation.  It is simply better than the alternative.

Investors need to be aware: your brokerage firm sends records of every taxable event to the IRS.  Until recently this did not include gain and loss information, which was self-reported.  However now it does.  I’m not sure if this change was due to improved technology, the government looking for sources of revenue in tough times or both.  But you will definitely want to file numbers matching what your brokerage firm sent.

Missing items get noticed.  I was a tax preparer for three years, and sometimes clients would provide incorrect or incomplete information.  In these cases the IRS would send a letter stating that their return was only partially finished.  Then I would have to file an amendment to clear things up.

The IRS will assess penalties and interest without feeling or regard for circumstances.  In extreme situations tax problems can even send you to prison. If you think about it they really have to rule with an iron fist.  I’m sure every sob story known to man has been used many times over.  If there was not a hard line on enforcement everyone would try to get out of paying.

An old coworker of mine illustrates this concept well.  Her parents inherited money and they were unsophisticated in financial matters.  So they hired an attorney to manage the situation.  Their attorney stole all the money, didn’t pay their taxes, and landed them in a heap of trouble.  This situation was very real: the attorney was disbarred as a direct result of his actions.  But IRS caseworkers did not forgive the parents’ debt.  In order to cover taxes, penalties and interest, which totaled many thousands of dollars, they had to take out a loan against their home.

Another person I know did not file a tax return for three years.  There were many estate matters after her husband passed and she got behind.  So the IRS initiated backup withholding.  This means that 28% of every dividend or interest payment to her brokerage account was automatically sent to the government.  Eventually it all got sorted out.  But in the meantime the IRS made sure they were going to collect as much of the balance due as possible.

Life is tough enough without adding tax problems.  And besides, as an uncle of mine always used to say, “You can’t fight city hall”.  That probably isn’t true all of the time.  But it definitely is in the case of the IRS.

© 2014 – Essentials of Investing
Articles presented here are general opinions for your own consideration.  They are not specific advice for any one investor.
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