MELISSA BLOCK, host:
The IRS commissioner, Douglas Shulman, came to our studio today to answer some of your tax questions. We asked you for those earlier this week.
As we just heard in Scott's story, the IRS is trying to be more flexible with taxpayers who are in financial trouble. Commissioner Shulman reiterated that message. He says the IRS can be lenient in hardship cases. If you find that you're unable to pay what you owe, he offered this advice: Be upfront about it.
Mr. DOUGLAS SHULMAN (Commissioner, Internal Revenue Service): The most important thing is for people to file their taxes on time. If they can't pay, they should attach a note to it, send it in. We'll either give you a call or you can call in within a couple of weeks. And then you can work through a number of programs. We have installment plans, which is the first choice. And then if people can actually prove that they can't pay their debt, we've expedited procedures, make sure we're fully staffed to work through issues with you. So you need to make sure, A, you file your taxes on time. The last thing you want to do is disappear, because then if we find you, you'll actually be in trouble.
BLOCK: And just stick a note on it, really, saying, sorry I can't pay this right now?
Mr. SHULMAN: Stick a note on it, say there's a balance due. We'll obviously reach out to you if there's a balance due. And when we reach out to you, ask about an installment plan. If you don't ask and you tell someone you can't pay, our people know about installment plans and they'll work with you.
BLOCK: If you are paying late, will you be charged penalties and interests?
Mr. SHULMAN: There's a whole set of penalties and interests that are written into the tax code by Congress and signed by the president. You will be charged penalties and interests, but we have the ability to abate penalties. By law, you have to pay interest because we're giving you a loan. But we can abate penalties.
So if you're in a legitimate difficult economic situation and you legitimately can't pay your taxes, then you should pick up the phone and talk through with our folks. I also want listeners to know it's not a free ride. People who can pay their taxes are going to be expected to pay their taxes because in these difficult economic times, there's a lot of people who are also struggling who are paying their taxes. Government's being called on to do a lot more right now, and we do need to collect the money to fund the federal government.
BLOCK: I want to start putting some questions to you that were sent in by our listeners when they heard you were coming to pay us a visit. And a lot of them reflect the economic times we're in.
Here's a question from listener Homer Williams. He's writing from Reading, Pennsylvania, and here's what he says: Like most people, my IRA has tanked. It is now worth less than my original contributions. In ordinary times, I have to pay taxes on the earning as I withdraw from it. With the loss, when can I deduct the loss? What is the answer to that?
Mr. SHULMAN: Well, Melissa, your listener probably won't like this answer. When you put money into an IRA, you're actually putting pretax money in. So you never paid taxes on that. And therefore, when it declines, on an IRA, you don't claim gains or losses.
BLOCK: We got a question from listener Javier Ochoa(ph) of Scottsdale, Arizona, and he asks this: I'm currently unemployed. After I was let go, I had to convert my 401(k) to a rolled-over IRA, which means I can't borrow against it like I would be able to if it were still a 401(k). He says, money is tight and I'm struggling to keep my household going until I get my next job. How do I pull money out while minimizing my penalties and taxes?
Mr. SHULMAN: So in general, when you pull money out of an IRA, you have to pay taxes on it and there's penalties. Under some circumstances, you can actually pull money out without paying the taxes or having penalties. Those circumstances depend on your age, if you have a disability, and what you're going to spend the money on.
And so what I'd encourage the listener to do is talk to their plan administrator. They can call our toll-free number, which is 1-800-TAX-1040. They can go to the Web or if he uses a tax professional, to talk to them. There are some rare circumstances where you can actually pull the money out and if they're circumstances that he thinks he's eligible for, I'd encourage him to look further into it.
BLOCK: There are certainly a lot of people finding themselves on unemployment for the first time. And here's a question from Jane Gordon of Portland, Oregon, a rhetorical question maybe: Why are unemployment benefits taxed? When you're unemployed, you need every penny of that little bit of income.
Mr. SHULMAN: Yeah. It's income that comes in to people so generally, unemployment is taxed. A law that was recently passed actually makes for 2009 the first $2,400 of unemployment in 2009 isn't going to be taxed this year.
BLOCK: But that doesn't apply for people doing their taxes right now.
Mr. SHULMAN: It does not apply for people doing their taxes this year. It's unemployment income coming in 2009.
BLOCK: I want to move on to a question from a listener, Lauren Rogers(ph) of Sterling, Virginia. And she writes to say that in 2008, she bought a foreclosed townhouse - probably a lot of people in that position right now. We are looking at taking advantage of the $7,500 tax credit. Ms. Rogers wants to know, are there any other tax advantages or benefits that we should be looking at as first-time home buyers?
Mr. SHULMAN: Yeah, the tax code provides a number of benefits for home buyers. Rather than me giving advice over the air and missing - there's a great publication on our Web site, www.irs.gov. Just type in home buyers, and it gives you all of the deductions that are allowed and all of the benefits that are allowed under the tax code for home buyers. So I'd encourage the listener to go to our Web site.
BLOCK: We got a, sort of, more global question from listener Jim Huddleston in Lawrence, Kansas. And he says that he read that the IRS is not collecting about $300 billion a year, and that the entire stimulus package could be paid for in three years if the effort was made to collect. And he says, why don't you do it?
Mr. SHULMAN: Yeah, that's a great question. What he's referring to is the estimate number for what we refer to as the tax gap, which is the…
BLOCK: What you think you're owed.
Mr. SHULMAN: Yeah, the total amount owed minus what we actually collect. Every country has a tax gap, and the U.S. actually has one of the highest voluntary compliance rates in the world. The reason we don't collect all of the money, probably the most important, is - one, is inadvertent mistakes. The tax code is incredibly complex and people just make mistakes. And then second, some people are trying not to pay what is due. That's why it's very important for us to run outstanding customer service to try to bring people in who are making mistakes, honest taxpayers who are trying to pay, as well as running very rigorous enforcement programs that we can bring criminal charges against people for those who are trying to evade.
The other thing to note is if you get a paycheck, and you get a W-2, and taxes are withheld at the source and the W-2 is actually sent to the IRS, the compliance rate is 99 percent. So beyond what just the IRS can do, we've also been working with Congress to pass other information-reporting laws for people who aren't wage earners or for taxes that don't come out of the wage, which can really help with compliance.
The best example is last year, Congress passed a bill that's requiring brokerage firms to send to the IRS the capital gains that people have when they sell a stock or bond.
BLOCK: So that's reported directly to you, or will be?
Mr. SHULMAN: Exactly.
BLOCK: I think that $300 billion number actually understates the tax gap. Am I right on this? That the IRS estimate from 2001 was that the gap between what you're owed and what you collected is - what, $345 billion?
Mr. SHULMAN: Yeah, the number was around $350 billion, but through our collection efforts directly, we brought in about $50 billion.
BLOCK: So that's the…
Mr. SHULMAN: So what was left was the $300 billion. The important thing to know is these are estimates. One of the problems is the money that doesn't come in, it's - you've got to estimate it because you don't know what it is. You definitely know what the money is that does come in.
BLOCK: We've been talking with Douglas Shulman. He is the IRS commissioner. Thanks for coming in.
Mr. SHULMAN: Thank you.
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