Okay, the press has me officially riled up – well, the press and Governor Rendell (D-PA). Suddenly, the tax amnesty program has everyone all fired up about scofflaws. Yep, everywhere you look – even on the amnesty ads – tax officials and the media are painting tax delinquents with a broad brush, labeling them as tax scofflaws. To quote Inigo Montaya from the fabulous movie, The Princess Bride:
You keep using that word. I do not think it means what you think it means.
Let me help you out. According to Merriam-Webster, a scofflaw is “a contemptuous law violator.” That’s not the same as a non-compliant taxpayer. Trust me. In more than ten years of practice in tax law, I am here to tell you that a majority of folks who fall behind on their taxes are not contemptuous law violators. Most of them are simply overwhelmed.
Let me clarify that I’m not saying it’s okay not to pay what you owe. But I think that it’s easy to be judgmental when you’re a W-2 employee. Generally, that means that your employer withholds and you file one or two tax returns (federal and state, depending on whether you live in a state which imposes an income taxes) one time a year, the same day every year. If you live in a municipality that requires an additional return, maybe you file a third – also once a year. And then you’re done.
But say that you’re an independent contractor. You’re more than likely required to make estimated payments. Instead of two or three returns, you now have to file between ten or fourteen: four estimated payment vouchers each for state and federal, possibly also for local taxes. And you still have to file your “regular” tax returns. If you live in a municipality like Philadelphia, you may also be subject to additional taxes (and tax returns) such as the Business Privilege Tax and the Use & Occupancy Tax.
It’s even worse if you’re a small business. Let’s do the math… If you have even one employee, you may be required to file quarterly statements with federal, state and local taxing authorities. So, if you live in a city like Philadelphia, that automatically bumps you to twelve quarterly statements (federal + state + local). Each of those taxing authorities also requires an annual reconciliation. So we’re up to fifteen tax returns – and we’re not even done with payroll items. Add state and federal unemployment tax returns. That’s at least five more. Now we’re up to twenty. Twenty payroll returns for a small business for one year.
In Philly, if you do business, you also file a Business Privilege Tax return. In fact, the City requires “every individual, partnership, association and corporation engaged in a business, profession or other activity for profit within the City of Philadelphia” to file a Business Privilege Tax Return whether or not they earned a profit. That includes rentals. (You may also have to file a Net Profits Return if you’re a pass through entity, but I won’t include that in the count.)
So up to twenty-one. Add in Use and Occupancy Tax Returns (quarterlies). Up to twenty-five.
If you’re a partnership or corporation (including an s-corporation or LLC), you likely have to file corporate returns with the feds and the state once a year.
So up to twenty-seven.
In Pennsylvania – and in most states – you also have to file an annual report for your business.
Up to twenty-eight.
If you’re a business that engages in sales, you also have to submit sales tax returns – monthly! So twelve more returns.
We’re up to forty.
In the midst of all of this, you’re still responsible for your personal income tax returns. Again, depending on where you live, that could boot you up to forty-three.
I’m not even including tax returns on special items like cigarettes, alcohol and motor vehicles… Nor other employment-related filings, like worker’s comp, and other licenses and permits which aren’t truly “taxes.”
I’ve also assumed that returns are required to be submitted quarterly. For some businesses, the requirement is for monthly filings – boosting the number of returns due by an amazing twenty-four additional submissions per year.
So, just for the basics, a small business can expect to pay up to – and in some cases more than – forty-three tax returns. In one year.
Do you think it’s possible – just possible – that a small business owner might miss one or two? Or three or four?
Does that make him or her a scofflaw? I say no.
In all of the years that I’ve been practicing, the large majority of my clients who owe taxes do so not because of a contempt for the law – but rather out of either a misunderstanding about:
1, what was actually due; or
2, when returns were actually due since some returns are not due at “regular” times – like the City of Philadelphia’s insistence on a March 1 deadline for wage tax reconciliations, even for individuals.
And what usually happens is that the business owner gets overwhelmed and figures they’ll fix it “later.” But “later” gets later and later. Often it snowballs, especially when the economy is tough, because business owners keep getting further and further behind until the penalties and interest actually exceed the original amount of tax due.
In many instances, taxpayers may not even be aware that tax was due until they receive a notice. A non-filed wage tax return? A missed business privilege tax return? An errant unemployment compensation tax return? If you don’t have professional help to figure these things out, it’s easy to fall behind. That is, however, not the same as purposeful and contemptuous.
That’s not to say that there aren’t scofflaws out there… I’ve dealt with those folks, too. I’ve had clients that didn’t want to pay what they owed or didn’t want to file returns. I’ve dealt with folks who significantly and willfully underreported their income. And I’ve blogged about similar folks – the celebs who don’t pay up for years, the tax schemes in place simply for tax avoidance. But if my experience is any indication, those folks aren’t the norm: I’m willing to bet that those folks do not constitute the majority of taxpayers tagged as noncompliant.
So while I applaud states like Pennsylvania and New Jersey for offering amnesty (as well as cities like Philadelphia), I wish they would scale back the character attacks. You can ask folks to pay up without resorting to nastiness. Such attacks are completely unnecessary.
Besides, my mother always told me that name-calling wasn’t very nice.
Agreed.
But perhaps the word should be used for people who purposely misuse the law KNOWING that others make genuine mistakes? 🙂
If only we could suss them out.
(40 is insanity.. I file 8 papers per year for my taxes, and then my end of year income taxes are about 7 documents and that’s it)
You just made the case for both the replacement of the current income tax system and the elimination of lawyers. The lawyers are the chicken and the tax code is the egg.
It is interesting to see that the US are having the same problems with their government as we are in the UK – at least we have an election this week so I am hoping that the party that get in do good things for business tax
I understand your irritation. I think that it’s time for a more rational tax penalty policy – one that would take into consideration the problems of the real “small business” – the micro businesses. The ones who legitimately need a little more room to maneuver through the compliance morass.
I would recommend special, reduced penalties on a “micro-business” (one with five or fewer employees and gross revenue less than $1MM). These are the businesses most likely to need a second chance and some relief from the debilitating cash drain penalties can inflict on a small business. The ones who truly need an amesty when they fall behind.
Don’t leave it up to a desperate legislature looking for cash in desperation to close a budget gap. Build it into tax policy and maybe there won’t be a need for an amnesty at all.
I so appreciate your writing this post. My husband has a computer animation business that is a sole proprietorship and then my husband, father, mother and I have an LLC investing company. Between the two I am constantly worried I’ve forgotten to file or pay something… and I’m a LAWYER! So… it’s confusing for all of us. Unduly so, in my opinion.
I totally agree. 95% of the people who come to me are completely ignorant of the myriad additional US tax forms required for filing tax returns when they live overseas. They genuinely want to file and pay, but can’t figure out where to start.