Are The Tax Rebate Stimulus Checks Just a Crafty Way To Catch Cunning Criminals?

Alliterations aside, it makes for an interesting argument. To have been (and still be able until Oct 15, 2008) eligible to receive a tax stimulus package from the US Government, you need to file a 1040A form; once you file the form, you’re in the system – is it putting out a short bait to get several bigger fish?

The Facts

What Are We Dishing Out and Where?

The US Government will be sending out approximately $150 billion dollars worth of economic stimulus package checks this year to “stimulate the economy”. According to the Wall Street Journal:The $150 billion stimulus is based around tax rebates – presumably for consumers to spend — and an increase in the conforming loan limit amount of $417,000 to allow more consumers to take advantage of potentially lower interest rates.

Some are wary of this, believing it won’t do the trick, as it does not encourage either savings or investment, which is what the economy needs now. “The deficit spending should be aimed at increasing aggregate demand, as opposed to providing a windfall to households and businesses that will only enhance wealth or profits,” writes Menzie Chinn, on the Econbrowser blog.

The IRS says that they’ll keep the “net” open AFTER the April 15 deadline to October 15, 2008 to file. This isn’t news; once the IRS starts sending CP5xx notices, you need to set up an extension (up to 120 days, interest and penalties apply which falls conveniently on October 15) *or* a formal installment agreement.

The IRS encourages you to file a return even if your income is low or much of your income is tax-free. File your return, if possible, by the regular April 15 deadline. If you file after April 15, with or without a tax-filing extension, your payment will be delayed. If you qualify for a payment, you can ensure that you get it by filing your return by Oct. 15, 2008.

The caveat here is that you have to file a 1040A form.

What is a 1040A form?

Form 1040A is for those that have a bit more complicated tax situation. You can use all of the same information with this form as you do with the EZ form; it just is the best form for those that have dependents, student loan interest, education credits or deductions, as well as additional types of income that need to be claimed. T

Form 1040EZ if for tax payers that do not own their own home, as this simplifies the tax process. In addition this form is for those that do not have any dependents as well as limited deductions.

Investopedia defines it as:

What does it Mean? A simplified version of the 1040 form for individual income tax. To be eligible to use a 1040A form, an individual must fulfill certain requirements such as not itemizing deductions, not owning a business and having a taxable income of less than $100,000.Unofficially known as the “short form”.
Investopedia Says... While the form can be slightly more complex compared to the “1040EZ”, it is still relatively simple in comparison to the 1040. Once an individual’s financial situation becomes complicated with dependents, special deductions and credits (such as those associated with post secondary education tuition), most taxpayers will often need to switch from filing with the 1040EZ to the 1040A.

Who Has Not Filed?

According to Kiplinger, about 5.2 million retirees and disabled veterans still need to file a tax return to receive their rebate checks. That’s about one-quarter of the people in that group who are eligible for the stimulus payments but haven’t completed the paperwork required to get the money.

The USAToday chimes in to the debate and states that about 74% of the estimated 20 million retirees and veterans who qualify for the rebate have filed tax returns, the IRS said last week.

How many of these people will actually call it in and claim I’m not sure – but we’ll take numbers we’ve been given here and just estimate how much of the money is going to go unclaimed at 26%. 26% of 150 billion is about 39 billion dollars that won’t even go claimed that’ll get put back in the US Government pocket.

In 2006 the Federal Government itself was accountable for nearly 3 BILLION in tax money that wasn’t received by its own employees not filing. Gaining just this number back would account for 2% of that chunk they’re spending to “stimulate” the economy.

More than 450,000 active and retired federal employees did not voluntarily comply with federal income tax requirements for the 2005 tax year, according to documents obtained by WTOP through the Freedom of Information Act.

The total balance owed is $2,799,950,165.

So Who Is Milking The Most Out Of Uncle Sam?

The biggest gap seems to not come from corporations OR employers, but from individuals themselves. Mailtribune points out that some say the IRS can squeeze as much as $100 billion a year out of tax cheats. Olson and others agree it could probably be done. “But not quickly and not easily,” said former IRS commissioner Charles Rossotti. “And not without doing things people may not be willing to accept.”

According to the IRS, taxpayers paid about $1.8 trillion on time in 2001, leaving an estimated $345 billion outstanding. (The IRS estimates that it will collect $55 billion through routine enforcement.) Those who didn’t file returns or under paid accounted for $60 billion. But the biggest loss came from underreported income: $30 billion from corporations, $54 billion from employers and $197 billion from individuals.

CBSNew.com says that the IRS does claim some progress in cracking down on cheaters. The agency’s commissioner, Mark Everson, said enforcement revenue has climbed from $34 billion in the 2002 budget year to $49 billion in 2006.

The audit rate for individual returns has gone from a little over one in 200 in 2001, to about one in 100 in 2006, with the returns of millionaires getting closer looks.

For the past four decades, voluntary compliance with U.S. tax laws has held relatively steady, varying from 81 to 84 percent, according to the Government Accountability Office.

But the gap’s size in dollars has grown with the economy, jumping from about $95 billion 15 years ago to nearly four times that today to nearly a staggering 400 billion dollars; which is conveniently more than enough to cover the $150 billion dollar bill for the Economic Stimulus Package I’d suspect.

Conclusion

Although I’m putting the stimulus check to good use, and I’m interested in free money when I can get it, part of me believes this may be a very nicely coordinated PR stunt to make the government look good.

I like the fluff I see around the tube and internet about wanting to claim your unpaid tax money that Uncle Sam is holding on to; it feels like you’re “sticking it to the man”, but keep in mind there is likely some propaganda around that in which they’re not telling the whole story.

Think about the people looking for money that get their hand caught in the cookie jar – it doesn’t turn out so well for them. 🙂

It may also have a piece in it to milk those few folks that are a bit more “dishonest” with the IRS into taking the bait to recover a much bigger biscuit.

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