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I know in the US you don’t have to file your tax return until mid April. Here in the UK the filing date has just passed at the end of January. I’m always amazed by the sheer number of people who fail to meet the filing deadline, as if it somehow sneaks up on them despite being the same date every single year. Last year, even with reasonable extensions, it was close to 10% of the population who ended up getting hit with late fines. One has to wonder what they thought was going to happen.
The numbers in the US are even more staggering when you consider what’s at stake. The average American household pays somewhere in the region of $15,000 to $20,000 in federal income tax each year—though of course that average is skewed upward by high earners, and the typical middle-income family pays considerably less, the lower 50% is in the region of $900. The IRS processes over 150 million individual tax returns annually, collecting trillions in revenue. With figures like that, you’d think people would be rather more careful about getting things right. You’d be wrong, of course.
Millions of Americans end up paying penalties they could have easily avoided with a bit of planning. The IRS charges a failure-to-file penalty of 5% of unpaid taxes for each month you’re late, up to a maximum of 25%. On top of that there’s interest and potential failure-to-pay penalties. If you owe $5,000 in taxes and file a few months late, you could be looking at hundreds of dollars in unnecessary fines. That’s an awful lot of money to throw away simply because you couldn’t be bothered to keep your paperwork in order. The IRS must send thank-you notes.
Then there’s the truly baffling phenomenon of people who are actually owed money but simply never bother to claim it. The IRS estimates that billions of dollars in unclaimed refunds go begging each year. The average refund in the US is around $3,000, yet roughly a million taxpayers fail to claim what’s rightfully theirs each year. After three years, that money becomes property of the Treasury. It’s rather like leaving a cheque in a drawer until it expires, except you’re the one who has to do the legwork to get the cheque in the first place. The same people would undoubtedly kick up an enormous fuss if their employer shorted their paycheck by even a fraction of that amount. Apparently free money only counts if it arrives without any effort.
The reasons people put off tax filing are as varied as they are amusing. Some claim they’re waiting for documents to arrive, as if these things materialize by magic. Others insist they’re simply too busy, which is rather rich considering they find time for social media and binge-watching. Then there’s the crowd who find the whole thing too stressful, so they deal with it by not dealing with it at all, which makes everything more stressful when the deadline looms. What happens is that a manageable annual task transforms into a panic-inducing crisis, complete with rushed calculations, missing receipts, and expensive penalties. The procrastination meant to avoid discomfort creates far more discomfort in the end.
For the majority of people, it’s only slightly complicated. A bit of organization with your paperwork throughout the year covers most of the issues. I’m one of those tediously organised individuals who files on the very first day it’s possible to do so. Last year, according to our tax authorities’ statistics, I was one of only 0.5% who did. I’ll confess, I maybe need to get a proper life. I know this is not normal behavior and I’m a bit of an oddity. My wife Suzie has learned not to ask me for help with household projects because I once color-coded the pantry by use by date. But really, you don’t need my level of neurotic efficiency to avoid penalties. You just need a folder and a calendar reminder.
But still, quite a few will be sitting there in mid-April in a state of mild panic, surrounded by receipts and forms, wondering why you do this to yourselves every single year. And yet somehow, come next year, they’ll do exactly the same thing again. At least it’s predictable. I wonder what the most entertaining excuses will be this year? I’ll be watching from my annoyingly tidy desk waiting for the answer…maybe their pet piranhas ate the receipts?
Way easier to download all your tax forms rather than waiting for US mail.
The IRS could make it much easier to file taxes. The Nordic countries especially have a system that makes it easier and less painful to file. A web search provided this description: Tax filing in Nordic countries (Sweden, Norway, Finland, Denmark, Iceland) is highly digitized, efficient, and user-friendly, often requiring little more than verifying pre-filled, online, or text-message-based tax returns. Employers and banks report data directly to tax authorities, allowing many citizens to simply approve their assessment by early spring deadlines.
TurboTax (which I use to file) and other forces that profit from the current inefficient system lobby to maintain the status quo. Simultaneously, corporate tax attorneys lobby to ensure favored loopholes and exemptions are preserved for the wealthy and privileged. We could do things differently but there is no appetite among our wealthy representatives in Congress to do so.
I have to say, the UK system is remarkably straightforward. TurboTax and similar software exist here, but most people don’t actually need them. The UK tax authority has an online portal where you enter your information and it calculates everything automatically.
Exactly. That’s how I filed in the UK. Took me only a few minutes. Just as with the US health “system”, there are too many vested interests.
I have several friends— widows who should know better — who tell me every year that they can’t keep track of the paperwork needed to do their taxes. They rely on their accountants to download it. I’ve repeatedly told them their accountants are on the clock, and it’s temps in the accountants’ offices who download the forms. But every year, it’s the same deal— and then they complain about the cost of tax prep! I’m trying to get my husband up to speed with this . I’ll consider myself a success, if he just puts all the materials in a big envelope to take to a preparer— though turbo tax is well within his skill set!
Meanwile today is my first stint as a volunteer tax preparer at Goodwill. Last year, we had a 103 year old come in with all his paperwork in perfect order!
I’m guessing that 103-year-old has had plenty of years to perfect the process!
My first day for AARP is tomorrow (2/3). Have a great tax season, Marilyn.
Same to you. Funny, I enjoy doing other people’s taxes; but doing ours makes me nervous.
I think many people in the US don’t receive all the tax documents from their investments until just a couple of weeks before the deadline. Also, from experience, I know there is a good chance that some of my investments will send me revised documents very late in the game, which might make me have to file an amended return had I filed months before the filing deadline. Because of this, many CPA’s recommend filing for an extension, just so you’ll be filing with accurate data.
Even if some documents don’t arrive until the last minute, the smart move is to have everything else completed and ready beforehand. That way you’re just dropping in the final pieces of information. Waiting until you have everything to even start is a guaranteed path to stress and premature gray hair.
LOL, you color coded the pantry? What a great way to get out of future work. I’m reminded of the time that, during my failing 1st marriage, our marriage counselor asked for our daughters to attend a few sessions. My wife complained about me being unorganized and sloppy. Our oldest daughter, looking baffled at her mom’s remark, said to the shrink, “you know how everybody has at least one junk drawer where all sorts of things go to die, well my dads drawers are all organized”.
Every year I would get at least one new client who needed to file multiple years taxes. I think that in most cases, some sort of anxiety and/or depression was involved.
I would use a simple file folder to organize a completed tax return. On the left side I would staple all of the source documents, in the exact order that they were entered onto the clients form 1040. On the right side I stapled the tax return and necessary worksheets. After reviewing the return with them, I’d explain that for next year, they just needed to look at the docs on the left side, in order to know what would be needed for the next tax return, keeping in mind that they may have some new items to be mindful of. Still, there was a significant number of clients who would be scrambling/freaking out when mid-April rolled around. Human nature, I suppose.
The color coding was actually less elaborate than the article made it sound—I was being a bit hyperbolic there. Really, I just stick red labels on anything in the pantry that’s about to expire so it catches my eye. Suzie completely ignores the system though lol
It’s particularly surprising with the UK. Of course, things may have changed since I lived there, but it was orders of magnitude simpler to do my taxes there than in the US.
Every time US politicians ‘simplify’ taxes, they actually do just the opposite.
It is very surprising, not only given the greater simplicity, but also the fact that the UK tax year ends in April, so there are almost nine months to figure it out.
It’s genuinely baffling how many people miss the deadline. I’ll be honest—I really can’t wrap my head around it.
Mark,
You know more about the US IRS than I do. Probably because I filed my taxes in January and always try to keep any refund below 1K.
David—I didn’t have that knowledge just sitting in my head either. When I heard the news about the percentage of people who missed the UK deadline, I knew I had an article idea, but I still had to spend several hours researching the US system to get the facts straight.
My 1099 won’t come until the middle of February, and my K-1 should show up around the beginning of March. My tax spreadsheet is ready, but I need the numbers to put in it.
K-1’s. I hated them when I was part of a partnership. The general partner didn’t give a fig about the inconvenience for everyone else, and always filed for an extension to submit his taxes via an accountant. I will never again be part of an investment like that.
I had a similar experience with a K-1. I had everything else ready by February 1, but was delayed every year by the general partner who filed via extension.
My K-1 comes from the investment club, of which I am the president. We can’t do the K-1 because we’re waiting for our 1099 from Fidelity!
I looked for mine on Fidelity today. Looks like they may be available on the 7th. Hopefully they don’t give us a corrected 1099 later in the tax season.
And Fidelity may be waiting on some oddball investment still trying to classify the distributions they made throughout the year. Schwab is always making me wait for my mother-in-law’s 1099, and I think they’re waiting on Gabelli funds.
Understood. I’m still waiting for my Schwab investment statement. I think it’s scheduled to arrive in mid-February.
I was an investor in one particular limited partnership where the general partner never filed anything on time. HIs own taxes, property taxes, etc. He therefore did not care about the limited partners, who all wanted to file their returns on time. I got out of that partnership as soon as I could, and decided to never be part of another one.
No one likes the additional tax complexity of pass through tax entities but that complexity has historically been out weighted for small business by the available choice to avoid double taxation due to a tax at first the entity level and then a second tax at the individual owners level. To avoid double taxation entities and their owners have chosen to not be taxed as a C-corporation when possible.
Also, early in my working career the availability of some company retirement plans were limited for those in a non-corporate professional group and thus pass through S-corporations came into existence (1958).
The days of simple general partnership entities were over when many unlimited liabilities could be mitigated via choice of entity and the lower taxes and better owner benefits sealed the deal on choice of entity.
Unfortunately, various groups over the years have been able to lobby for special carve outs or tax benefits for the group being lobbied for and, in my opinion, we now have a tax system that is at a point where the current US tax system results in neither fair taxation nor simple compliance.
Some of those K-1s barley make it by October 15.
Nicely done! And so true. I use TurboTax and I actually enjoy the process. No judging please.
There are certain personalities that actually enjoy nerdish things; that’s how I ended up owning a tax practice. Welcome to my world, Ted.😁
Those average numbers are very misleading Mark. The bottom 50% of taxpayers pay an average under $900 in income taxes.
I wonder if that number includes taxpayers who receive refundable tax credits. A taxpayer with three young children can, depending on their income, receive a little over $13,000 in such credits.
That’s actually a fair point, I’ll give it an edit to highlight that.