The US Tax System is voluntary so the government uses a variety of tactics to ensure compliance, i.e. carrots and sticks. The idea comes from the days of riding horses. You could get your horse to move faster by offering it a carrot – a reward. Or you could simply whip the horse into compliance with a stick, in other words, a punishment.
Rewards of participation in the tax system can be intangible – dues paid in to demonstrate membership in the idea of America.
“To use the language of political theorist Judith Shklar, ‘taxpaying is an emblem of public standing, proof of one’s virtue and entitlement to political power In the contemporary era, debates about who deserves to be American are still couched in the rhetoric of who pays taxes’ ”. Read My Lips by Vanessa S. Williamson
Also, for the vast majority of employees, tax refunds are seen as free money instead of the return of principal with no interest paid on a short term loan to the US government. This can be perceived as a reward as well.
There are consequences for failure to comply with the tax code even though it is voluntary. Most of the penalties are civil and administrative, i.e. penalties and interest, if you end up owing. For those who don’t owe but who don’t file, if you fail to make a claim for your refund within three years of your filing date, your refund is forfeited.
If there’s criminal intent, i.e. hiding income, evading tax, the penalties get more severe. Criminal tax behavior is not the focus of this essay.
An important question remains, it defines how you live your life, that question is:
What happens in a no consequence environment?
Your child takes a cookie from the cookie jar when they shouldn’t, if there is no consequence, you may find your child will take from the cookie jar at will, and perhaps, so will his siblings. It’s easy to come up with countless other examples about the prohibition of murder and theft. You can also imagine the absence of consequence for crime would do society.
Failure to file tax returns or failure to pay income tax owed, with no consequence can eventually lead to the tragedy of the commons. The tragedy of the commons is a parable about over-grazing public land, i.e. the common. Adding just one extra sheep to a flock is beneficial to the herder and minimally damaging to the common, until all the shepherds think that way and minimal damage turns the common into barren land by overgrazing.
Failure to report and pay tax can lead to long-term irreparable government deficits which eventually leads to reduction in services and ultimately government and societal decline – another tragedy of the commons.
This is why consequences for failure to comply with tax laws are important. Yet, so many people are drawn to the siren song of getting penalties and interest abated, in other words, reduced or removed. There’s no reason to do that and the idea that the government would do that can lead down a slippery slope.
Here’s a truth bomb that blows up the mistaken belief that penalties and interest can be negotiated:
Interest owed to the IRS is NEVER negotiable.
Sometimes interest can be reduced by reducing the underlying tax debt on which the interest is being charged. How can the underlying amount be reduced? Amending tax returns to include unaccounted for deductions or write-offs or reducing the assessed penalties for reasonable cause. There are other tax reduction strategies that could be employed but those take some planning and are beyond the scope of this article.
Penalties can be reduced sometimes too. Assuming you get a favorable representative, the IRS can be receptive and generous to requests by first time offenders for penalty abatements if certain conditions are met. The IRS also has a formal process to request a reduction in penalties for reasonable cause assuming you have a reasonable cause(usually health or medically related) and have demonstrated due diligence, meaning you have paid or are paying your debt. Also, attempting a penalty abatement for anything more than a two-year tax debt situation is usually a futile exercise.
If you owe tax and if you qualify for relief, the relief might be the form in which you indirectly negotiate with the IRS about penalties and interest – but that’s a long game for experienced players.