April 18, this year's tax deadline, is rapidly approaching. As we close out this tax season, one of our resident tax experts, Bill Leary, comments on individual tax filing statistics. Bill is a Director in MFR's Tax practice and frequently comments on the political and legislative impact on the tax landscape. Bill can be reached via email or at 713.622.1120.

Filing Tax Returns -- Good News or Bad, Depending on Your Perspective

For years, the Masters golf tournament has served as an advance warning for U.S. individuals and many calendar-year  flow-through entities that the initial federal tax due date is rapidly approaching.  This year the due date is April 18^th for 2010 filings and 2011 estimated payments.  (The additional weekend to file is because of a District of Columbia holiday.)

As of April 1st, the IRS has received more than 89 million individual income tax returns for 2010, which is 64% of the 141 million returns expected for 2010.  Usually, 20-25 % of all taxpayers file in the final 2 weeks of the tax season, and about 7% seek a 6 month extension.  Often a federal tax extension is important because of missing or incomplete information.

Penalties and interest associated with non-filing and/or non-payment can be very costly.  In addition, non-compliance could also affect a taxpayer’s ability to make certain elections or result in additional penalties for failure to file certain information returns. 

Almost 75 million of returns filed have received refunds averaging $2,922.  E-filed returns accounted for approximately 77 million of the returns filed, and 28 million were submitted by non-professionals.

April 18^th is also an important day for the estimated 1.1 million people that did not file federal income tax returns for 2007.  The IRS estimates that half of the $1.1 billion in refunds are from estimated or withheld taxes paid during 2007.  (If a refund is available and returns have not been filed for 2008 and 2009 or there are other outstanding obligations, the refund will be held.)    

A serious mistake can result if a taxpayer with an overpayment in a particular year just assumes that the overpayment will be automatically applied to future years’ tax liability and, as a result, decides not to file returns.  Subject to several narrowly crafted exceptions, the ability to claim a credit may be limited to 2 years from the time the tax was paid if no return was filed.

In 2007, the Tax Foundation estimated that roughly 47.7 million tax returns, representing 91 million individuals, faced a zero or negative tax liability.  Adding to this figure is the 15 million households and individuals who file no tax returns at all.  In the case of certain low-wage individuals and families, the federal Earned Income Tax Credit (EITC) is an important reason to file returns.  Depending on the number of dependents and filing status, a refundable credit of over $5,600 may be available, and credit may be available for those with adjusted gross income of over $48,000.  In 2009, nearly 24 million people received $50 billion in benefits under this program.

Returns filed in 2008 by individuals with adjusted gross income under $50,000 represent 48% of the returns filed and only 7.6% of the total income tax paid by individuals.  On the other hand, those with adjusted gross income more than $500,000, account for only 1% of the returns filed, but pay 33.2% of the total tax.

This brings into question the cost of compliance for lower income taxpayers, as well as a payroll withholding system results in full refunds of tax.  Americans may spend as much as 6.6 billion hours per year filling out tax forms, including 1.6 billion hours on Form 1040 alone.  In 2002 it was estimated that Americans spent roughly $194 billion dollars on tax compliance.  

Who bears the burden of the individual tax system?  In 2008, the top 1% of tax returns paid 38% of all federal individual income taxes and earned 20% of adjusted gross income.  Another factor to consider is that the top-earning 5% of taxpayers with adjusted gross income over $159,000 paid more tax than the bottom 95 percent.  Earning 35% of adjusted gross income, they paid almost 59% of federal individual income taxes.

Depending on your perspective, cutting the taxes on the “rich” may mean cutting the taxes of those who pay a large portion of federal taxes.