As previously noted here, the IRS has a contingency plan for collecting taxes in the event of the end of the world as we know it. Curiously, this is not the strangest policy adopted by America’s tax collectors. The entity that was responsible for collecting nearly $3.5 trillion from more than 250 million tax returns in 2018 has enough time on its hands to think through the tax implications of kidnapping, the taxability of bribes, and several other situations that you will want to know if you are going to be fully informed as you prepare your tax return.
Kidnap, Ransom, and Dependent Status
Every parent’s worst nightmare is the abduction of a child. The IRS might not be able to do much to stop such a scenario from happening, but they are prepared to tell you how it will impact your taxes. The regulations address whether you can claim a kidnapped child (your own — not one that you have abducted) as your dependent. The rules focus on how long the child was living in the home before and after the kidnapping. If the child lived in the home for a total of more than half of the year before and after the kidnapping, he or she is properly claimed as a dependent.
If you pay a ransom to get your child back, that has tax consequences, as well. This is why J. Paul Getty was tightfisted in the amount of ransom he would pay to get his kidnapped grandson back. Paying any more would not have been deductible.
Bribes: Illegal and Taxable
IRS Publication 525, “Taxable and Nontaxable Income,” includes this brief statement: “Bribes. If you receive a bribe, include it in your income.”
It’s Not Just Bribes
The definition of “income” is “any net increase in value, from whatever source derived.” While the above-referenced publication specifies bribes as taxable, that is not an exclusive list. Income from dealing illegal drugs, robbing a bank, or even contract murder is income and must be declared. The IRS can’t give a tax return to a law enforcement agency without a court order, but they can provide information on pieces of a tax return if it is undergoing an audit. Unlike Tennesee’s tax on drug dealers, the federal taxation of criminal activity is still legally enforceable.
If you are late in filing, make a mistake in calculations, or send in too little payment, you can be sure the IRS will hit you with penalties, fees, and interest. There is one exception, where they are more than willing to give grace. If you are entitled to a refund, the IRS will not slap you with a penalty, no matter how late you get around to filing your return.
Here to Stay
When war broke out between the United States and Spain in 1898, Congress instituted a 3% tax on long-distance telephone calls to fund the war effort. Four months after the tax was imposed, the war came to an end. It took a wee bit longer to repeal the tax, however. It continued to be assessed and collected until August 2006 — nearly 108 years after the war officially came to an end. In the years of its existence, more than $350 billion (adjusted for inflation) was collected, according to a 2015 report by the Office of Management and Budget. The actual financial cost of the war was $250 million.
IRS Computer: Almost As Old As Income Tax Itself
The IRS began collecting federal income tax on January 5, 1914, following the adoption of the 16th Amendment to the Constitution. For the first 45-50 years, all of the tax records were maintained in paper form. In the early 1960s, the IRS modernized, entering the digital age by creating a computer system known as the Individual Master File. Today, nearly 60 years after being implemented, the Individual Master File is still the computer system that maintains more than 1 billion taxpayer accounts. In other words, for more than half the time that federal income tax has been around, the IRS has used the same computer software.
The program is so old that finding programmers is much akin to finding speakers of dying languages. It is written in Assembly programming and relies on magnetic tape to store its data. The IRS spends more than $2.5 billion each year to maintain the antiquated system.
There is a plan to bring the IRS into the
21st late-twentieth century. The 2013 plan continues to be plagued by delays.
One Thing the Computer Can’t Handle
Because of the limitations of the Individual Master File, it is unable to deal with particularly-large numbers. As a result, it needs a separate, special computer to handle Bill Gates‘ tax return.
In 2006, the Microsoft founder said, “My tax return in the United States has to be kept on a special computer because their normal computers can’t deal with the numbers, so I am constantly getting these notices telling me I haven’t paid something when really it is just on the wrong computer. Then they will send me another notice telling me how bad they feel they that they sent me a notice that was a mistake.”
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