Sunday, January 31, 2010

Much ado about $68? For some taxpayers, it will be a lot more

I've already posted a fair amount about our New York State audit, and I'll be posting more.

I'm still working on redacting all the sensitive personal information such as SSNs, PINs, taxable income, and so on from our audit notice, but I'll be posting it soon, along with more comments.

It's reasonable for readers to wonder if I'm making too big a fuss over $68 plus $18 interest, but my guess is that notices like this have gone out to taxpayers all over the state.

All this posting is not really about me--it's about the insights into the audit process I hope to get for other taxpayers who may have far more at stake, and who may have far less resources to deal with tax challenges.

Many of those taxpayers are likely low-income taxpayers, for whom an audit notice like the one my husband and I received will present far more difficulties than it does for our family, for the following reasons:

1) Due to all the credits associated with dependent children for low-income taxpayers, they likely stand to lose a lot more than $68 if their right to claim a dependent is challenged. A low-income taxpayer who loses the right to claim a dependent on her federal and/or state return could lose hundreds or even thousands of dollars in credits, especially if multiple years or dependents are at issue on both federal and state returns. In the case of Rachel Porcaro in Seattle, the newspaper reports indicate that the IRS attempted to assess $16,000 in an audit challenging her right to claim her two sons in 2006 and 2007.

2) Even $68 (plus interest accumulating at 8%) is far more of a burden for low income families than it would be for ours.

3) Many low-income taxpayers might have a far more difficult time fighting off a tax department challenge to a dependent claimed on their 2006 return than we will likely have, for a variety of reasons:

a) We are your classic "Leave it to Beaver" sitcom family. My husband and I have been married for 30 years, our children have lived with us continuously since they were born, and there's absolutely nobody else in the world who could conceivably preempt our right to claim our two daughters on our 2006 tax return. Our dependent daughters' only absences from living with us have been clearcut cases such as college attendance, summer camps, etc. where the tax rules clearly and explicitly state that the absences are deemed to be "temporary" and therefore irrelevant for tax purposes.

b) We have continuously lived in the same home with the same mailing address for two decades. We have a great postal carrier and a secure mail slot. We live in a low-crime area with an excellent police force. We have a reasonable degree of confidence that mailings of tax notices will arrive promptly, and we don't worry about mailbox burglaries or vandalism.

c) We have plenty of secure filing space in our home in which to archive our tax records and other family documents which could be relevant to proving our right to claim our daughters on our return. We pay for most things that we buy by credit card or check, so it's straightforward to document who is providing support.

d) We are well educated, highly numerate and highly literate in our native language of English (and I consider myself to be bilingual with a fair degree of fluency in my second language of "tax-speak" as well!) I am exceptionally well-versed in the rules for claiming dependents on federal and New York returns, since that's a major issue that comes up hundreds of times each year at the VITA site I supervise. We have easy high-speed Internet access which makes it easy to retrieve archived copies of 2006 New York State tax instructions on our home computer to check whether the rules for claiming dependents might have been different a few years ago.

e) Our home phone is a landline with unlimited calling time each month. We don't have to worry about burning up expensive cellphone minutes if we are put on hold for long stretches trying to get through to tax department employees who can answer our questions.

f) If necessary, we have the funds to hire credentialed professionals with the expertise to deal with audits that threaten to become expensive, and we have the expertise to feel reasonably confident in our ability to select a competent professional who will do a good job for us at an affordable cost.

By contrast, many low-income families have far more complicated family structures where it can be much harder to document a bulletproof case as to which adult relative is entitled to claim a given dependent.

Low-income taxpayers and their children often need to move a lot, due to financial and other difficulties, which makes it hard to document a child's residence three years later. (If a tax authority claimed that our daughters didn't live with us in 2006, it would be easy for us to find neighbors who could serve as witnesses to that fact, because we live in a very stable neighborhood with little turnover and we ourselves have not moved.)

Low income taxpayers may find themselves squeezing into small spaces with relatives which may not have room for all their children, let alone room for storing great volumes of tax records. Due to space constraints or parental problems with health or other difficulties such as incarceration, substance abuse or domestic violence, some dependent children may bounce about a good deal from home to home of different relatives, and it may not always be clearcut whether a stay with a given relative is "temporary" or not.

The homes and mailboxes of low-income taxpayers are often less secure and subject to vandalism. Their mail may not reach them reliably or punctually.

Many low income taxpayers are "unbanked" or "underbanked," and therefore pay for most of their purchases in cash, which could make it very challenging to document support three years after the fact.

Some low income taxpayers do not have a lot of education, some have limited numeracy or literacy, some have cognitive disabilities (ranging from learning disabilities to mild dementia), some may not be native English-speakers, and indeed many taxpayers at all income levels are quite understandably not fluent in "tax-speak."

The tax code simply doesn't use the English language the way you or I do. Depending upon a variety of circumstances, your son or daughter may or may not be "your qualifying child," "your qualifying relative," or "your qualifying person" for a variety of different tax benefits, each of which may have slightly different definitions, despite the so-called "Uniform Definition of a Child." In the Alice-in-Wonderland world of tax-speak, "your child, in tax-speak doesn't mean the same as "your child" in everyday English. In tax-speak, "married" doesn't necessarily mean the same as "married" in everyday English.

It's no wonder that the National Taxpayer Advocate says that many low-income people just throw up their hands and don't even attempt to challenge the government's assertion that additional taxes are due.

1 comment:

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