A LOOK AT OUR TAX ANXIETY

I have come to understand that each of us settles into a particular level of fear, distrust, and resentment about taxes. It is important to recognize where we are on this comfort/discomfort continuum. At one end of the scale, people worry most about being audited, being caught doing it wrong, or unexpectedly having to pay a lot more taxes. These people are very concerned with having their tax return done on time and that it is absolutely correct. They usually take conservative positions with issues in their tax return. They like their returns to be "audit proof"!

On the other end of the scale are those who can't sleep if they think IRS is getting one more penny than they must! They spend much time and effort trying to find every possible deduction. They are willing to try almost anything on the chance they won't be audited, that they will win the "audit lottery". They also find it easy to have a good story to back up any of their claimed deductions.

Where we are on that (dis)comfort scale will influence our approach to getting the job done. Being aware of our position on this scale helps us understand and forgive our sometimes irrational behavior when it comes to avoiding this project!

Knowing this does not mean we will get the tax returns done on time, however. People at the extreme ends of the scale can have equal trouble actually filing their returns. For instance, the conservative taxpayer may have trouble figuring out how to correctly report something.

We might have received a large, for us, amount of money. We may not know how to report it and are fearful of how much tax we will have to pay. Perhaps we received a bequest (distribution) from some relative's estate. It came at just the right time, as it was desperately needed to pay off some important bills or to buy a car since the old one just died. At any rate, it was gone as fast as it came in, thank you very much.

Then we start to worry. Would we have to pay taxes on it? We certainly want to do the "right thing". We would never lie on our tax return. On the other hand, if we owe a lot of tax on that money, we could never pay it! This is the paralyzing anxiety! We may be too afraid to seek help, to ask a tax advisor just how much we might owe. April 15th will come and go and we will be living in fear that IRS will be knocking at our door. Surely THEY know! Surely THEY are on their way to get us!

This spiral of fear can go further, too. Once we have failed to file a return for one year, we might fear filing the next year. After all, we reason, what will IRS think if they get a return next year and they didn't get one for last year? Won't that surely trigger an audit?

Before I go on, I must relieve a little tension here. The poor person in my example has been going through their personal tax hell for nothing! They would not owe any taxes on the inheritance. This is generally true. Usually the only tax effect for beneficiaries of an estate is that they have to pay tax on their share of the income earned by the estate before it is all distributed. A quick anonymous call to the IRS information number might have cleared that up easily. However, I must emphasize it is very understandable that a person might spiral into the fear before they have a chance to check out how the rules really apply to them. What to do? Resolve the issues and finish your return as soon as you can and just send it in. If you receive a notice from IRS looking for the return, be sure to respond in some way. This will keep them from taking collection action if they have calculated that you might owe something. Remember, they may have information about the income you have earned, but they don't have any information about your legitimate business expenses. You might even have a loss! If you end up owing taxes, there will be late filing and late payment penalties, plus interest, though. If you have overpaid, they will send a refund, plus interest in some situations.

Of course, if you have effectively been underground, working under the table or living on illegal income, IRS may have no information on you. Unless they have reason to suspect otherwise, they usually assume you have determined that you were not required to file.. That doesn't mean you don't have to file a tax return, of course. It just means they may not ask you for a missing return.

What about the person who will do anything to avoid paying more taxes? I've seen that, too. In this version, we just refuse to believe we just might have to pay some taxes. We believe there must be loophole; we will be able to find one more deduction; there must be some special rule that only rich people know about! This obsession can build to the same intensity and result, again, with the April 15th deadline coming and going without the tax return being filed. We might also spend a lot of money on professional tax help, possibly racking up more in professional fees than we could save in taxes!.

Here, we might do well to go ahead and file the tax return on time, even though we believe it is not absolutely perfect. Later, when we discover the extra deduction or special rule, it will be relatively simple to file an amended return to correct it. Filing an amended return does not mean we will automatically be audited. Although each amended return is processed manually, by a human being, I have never seen an audit of the whole return result from filing such a correction. I have seen IRS ask for some clarification about what is being changed. Occasionally, they have challenged the item being changed, but never have I seen a full-blown audit.

If you know you're prone to this kind of stuck-ness, try to recognize the symptoms before you get too deep into the anxiety. Taking a few minutes to calculate the actual dollar effect of the item in question. For instance, if you forgot to keep track of your business mileage all year long to every single show or gallery, you might not be sure how to accurately estimate an amount to claim. Ask yourself "How many miles would I absolutely be able to prove?" and "How many miles do I honestly think it would all add up to if I sat down with my appointment book and reconstructed the year?" Multiply each of these numbers by the standard mileage rate ($ .29/mile for 1994) to see just how different the deductions might be. Then calculate what your taxes (including the Self-employment Tax) would be using one, then the other, number. The comparison should lead you to a decision you can live with. Then you can get on with the process of finishing up the return.

No matter where you settle in to the (dis)comfort continuum, know that you aren't alone! A lot of your friends have big tax secrets, too, eating a hole in their stomachs. Try talking about it, laughing about it. It appears to be part of the human condition! Go easy on yourself. The April 15th deadline is not really as ominous as we make it out to be! If your return isn't filed on time, it may just cost you a little more when you finally get it in.