Owing the IRS is unpleasant but owing the IRS as a result of someone taking advantage of your education level, lack of understanding, immigration status or simply because someone knows they can get away with it is abhorrent. Three conditions: being an immigrant, unbanked and low information makes tax debt by exploitation commonplace.
The unbanked are people who don’t have bank accounts. They are a part of society that isn’t often seen unless you live or work in the world of alternative banking i.e. check cashing shops, prepaid debit cards, payday loans. The unbanked typically operate on a cash basis paying for things in cash or money orders. According to the FDIC, there are about 7 million unbanked households in the US.
A portion of these people are immigrants, some without papers, some with proper immigration status. Many of these people become exploited because of their immigration status, lack of language proficiency, and general ignorance about banking, employment, or general responsibilities as a taxpayer.
About 10% of the people who reach out to me regarding tax debts are what we call “low information” taxpayers. For these people, short-term financial survival is their primary motivation. Everything else beyond that is an afterthought. As a result, they are not too concerned with paperwork like paystubs, W2s or 1099s. For 1099 workers, documentation is an after-thought.
The most organized of these low information taxpayers mail us a shoebox full of crumbled-up receipts. Proofs of purchase for cigarettes and soda, diesel for their truck, and movie tickets. They expect us to go through and categorize each one to help with tax preparation. I guess it’s better to include all receipts if you’re not sure which ones might qualify. But this ignorance and lack of knowledge can harm them if they are working with an unscrupulous tax preparer. We won’t even mention mileage logs since those are non-existent for this type of taxpayer.
Because these people are trying to survive, they are susceptible to exploitation -the failure to provide paperwork in real time or at all. Fraudulent paperwork can be submitted to the IRS which inflates what was paid to the worker. I’ve heard many variations on this theme: “I made $1000 a week but the IRS says I made $96,000. What is going on?”
I always chuckle to myself when a client tells me they were working “under the table” and that they later learned their “under the table” income was reported to the IRS. People who work “under the table” usually do so to avoid reporting and paying taxes. Whoops!
The boss-worker relationship is asymmetric for “low-information” workers. Dishonest employers can exploit these workers in other ways by characterizing an employee as a contractor thus avoiding the payroll tax obligation. It also harms the worker in the long run since those earning will not have a FICA, i.e. social security & Medicare deposit.
In the trucking industry, clients mention they get paid a percentage of the load carriage fee as a pay for their work with a 1099. The worker simply drives the truck which doesn’t belong to him, he pays no truck operating expenses, and is assigned the work. This sounds like an employee to me. This is an abuse of employee/contractor designation. The employer probably knows it. The worker might know but is often afraid of confronting his employer for fear of losing the work.
The decision of being and staying unbanked is financial. Unbanked/underbanked workers don’t earn enough to keep money in a bank account. Fixing the unbanked condition is not easy. Similarly, there is not a simple solution to being a “low information” taxpayer. Without knowledge and education about how the system works, exploitation and abuses will continue. Some of the most disadvantaged are immigrants for whom English is a second language.