Thursday, November 06, 2008

Fun with the IRS

We recently had some dealings with the IRS which is a great example of bureaucratic silliness and rather humorous. It all started about the time everyone started getting those tax "rebate" checks ...

We got our rebate check in the mail and happily put it into the bank thinking we might use it for a vacation or to purchase a freezer. Apparently, we weren't meant to keep it, for a day or two later we got a notice from the IRS that we owed them $200 more than the amount of the "rebate." I thought something was fishy, "Maybe this is the government's way of looking like they're giving out lots of money, but they really aren't because they take it right back." Although that would be an hilarious absurdity this wasn't the case.

We really did owe the government the money they asked for. A few years ago I settled an outstanding credit card debt with the bank which issued the card. I had heard that one needs to claim a debt forgiveness as income at tax time. Thinking the person at the bank with whom I was dealing would know a thing or two about such matters, I asked. He told me that if the forgiveness was considered income, I would get a W4 (or a W2 something) from the bank. Otherwise, he informed me, it wasn't.

I try to be an upright guy who strives to do the right thing, and paying taxes honestly is a Biblical command (Matthew 17:27, Matthew 22:15, Romans 13:6-7). Although I had no reason to distrust the person at the bank, I thought it best to ask around for another opinion. I consulted with a CPA and a couple other people I know who have some experience with the tax code, and they echoed the answer the person at the bank gave me. Satisfied, I waited to see what would happen come January.

When it was time to do taxes, I hadn't gotten anything from the bank other than a letter declaring that the debts were no longer owed. There was no IRS form to be seen, so we happily did our taxes without counting the "forgiveness" amount as income. We got back a pretty healthy refund that year, too.

When we got the letter from the IRS earlier this year, enclosed were copies of the IRS form the bank sent to the IRS along with a copy of the recalculated return for that year. Ta-daa, we owe them money. I was a little miffed about the whole thing because I felt the bank did me a disservice. But, the bottom line was that we owed the money based on the recalculated amount.

My wife and I described this situation with an accountant about this whole event, thinking it rather humorous. She offered to recalculate our taxes for that year and see if we could knock the amount we owed down a little; at least enough to get it where we just had to pay the "rebate" amount. She was successful, so we sent in an amended tax return along with a check for the amount we felt we owed.

A few weeks later, we received a letter from the IRS letting us know they were going over our paperwork again and that they would contact us again if need be. I figured the matter was pretty much settled and consoled myself with the though that the amount extra we sent in would pay for body armor for a soldier in Iraq - a worthwhile expense.

But, this wasn't the end of the matter. 4 months later we received another letter from the IRS. They accepted our amended tax return, but we owed some more money based on the interest accrued from the time we sent in our amended tax return until they accepted it. The total we still owed was $2.00. Now, I thought, we're getting into the absurd.

Thinking it over, I figured based on a person's salary to go over the paperwork, computer cycles, printing and postage, that letter cost far more than $2.00 to send. What a waste! I was pretty ticked off about it - not so much that the IRS wanted more money but that the bureaucracy was now wasting my money sending out a request for 2 bucks.

In the end, I sent a check for $2.00 to the IRS. Rather than quibble over 2 bucks and sending this transaction further into losing territory I thought it best just to give them what they wanted and get it over with. Ah, but that wasn't to be.

The day after I dutifully sent in my $2.00, we got not one, not two, but three envelopes from the IRS. The first envelope contained a check for $5.72. The other two envelopes, one addressed to me and the other to my wife, contained identical copies of documents which showed how the IRS actually owed us money, rather than we owing them $2.00. By this time the whole affair is so absurd I can't stand it. Not only did they lose money sending the bill for $2.00, now they've compounded the loss by $5.72 and however much it cost to process that check - and the waste of sending two identical letters to us.

As I described this series of events to the accountant who figured our amended return for us, she cautioned us to make sure if there is any interest which was paid to us that we make sure to count it as income next year or we'll be sure to be audited again. We better check those letters carefully. Though I'm not concerned about an audit, I certainly don't want to cause the national debt to increase because I forgot to claim a few cents as interest income.

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