Friday, August 26, 2016

three little words

Notice of Deficiency.

I am not certain there are three more disturbing words in English. Especially, when the IRS is providing the notice.

Yesterday, my friends in Nevada told me the IRS had sent me a certified letter. I knew it could not be good news.

Certified letters from the IRS usually do not contain notes of apology: "We sincerely regret we have been acting as bag man for the welfare-military-industrial and crony capitalist complex. Having seen the error of our ways, we are returning all of the money you have paid to the federal government since the day you started pulling weeds for the local bank branch in 1962. We wish you, as a free American, much joy in spending the money you earned and that we took from you."

Nope. It was a notice I had failed to properly report income from two sources in 2014. The IRS claimed I had received an additional unreported payment from a deferred income account and that my tax form did not reflect the total benefits I received from Social Security.

I did some quick research. The IRS is correct. For some reason, I slipped the deferred income into the wrong line on a form that did not add the amount into total income.

The Social Security entry was not initially my fault. I used the total I originally received from the federal government. Apparently, a corrected form arrived after I filed my income tax return. When it arrived, I did not look closely at it.When I retired in 2009, I seemed to be well-set for a pleasant post-employment life. Partly through my own ignorance, I did not take into account that I would have to pay income tax on my Social Security benefits at a marginal rate of 28%. That if I withdrew a large amount from my savings in any given year, it would radically increase the cost of my Medicare premium. And that when I withdrew amount from my deferred income account, I would pay income taxes on it at the same rate as when I was working.

The total due in additional taxes is almost $2,600 -- an amount I will gladly pay.

I searched through the packet for a website where I could acknowledge my stupidity and make an electronic payment. Certainly the IRS is modern enough to have a process like that.

I was wrong. The instructions make it perfectly clear that I must sign a paper waiver and mail it along with the deficiency -- as a paper check. And the time the packet takes to wend its way to The States, I will be incurring additional interest.

The most difficult task may be to find a check book for my account. Who writes checks these days?

Or was this is some sort of elaborate scam? We senior citizens are often preyed upon by the unethical.

Probably not. The address in Fresno is an IRS processing center. So, into a paper envelope it all shall go.

This week's Economist has an article about major protests concerning Chile's pension plan. Unlike most countries that have defined benefit pension plans, Chile decided it would provide its citizens with a defined benefits plan.

Each citizen was provided a savings accounts where the account owner could deposit up to 10% of his income. If the maximum amount (10% of income) was deposited, after 30 years a retiree could anticipate receiving 70% of his last income as a pension.

For those who fully participated, the returns have been outstanding. Instead of receiving 70%, full participants have actually received 77%.

So why the protests? Most account holders failed to make the maximum payments. Now, they are angry that some of their fellow citizens are receiving more in retirement than they are. And they want taxpayers to pony up for them. They also want to change the system to the type of defined benefit system that is currently putting financial strains on every western government.

It is a response we have seen around the world -- people wanting someone else to pay their benefits. This tax deficiency notice has made me wondering whether they are correct.

As I was growing up, I was told the wise and frugal person should forego immediate gratification to save up for the future. Particularly, retirement. So, I did. For 20 years, I went without one day of vacation. Instead, I invested the maximum amount of money I could in tax-deferred savings accounts and stripped my daily budget to the bone. I wasn't Bob Cratchit, but I was close.

Now, I am not certain I was the smart guy. Had I spent all of my income on my hedonistic desires, I could have had a lot of fun -- and my tax bill would be greatly reduced. I could then do what the protesters in Chile want -- expect the government to bail me out of my wrong choices.

It is thoughts like this that remind me why there are so many angry American voters. People who played by the rules and were told if they did, they could see a better tomorrow. They think someone lied to them. And they may be correct.

Of course, I still have the money I saved. A giant chunk of it is going to end up in the hands of the federal government, and there is very little I can do about it.

Well, I guess I could vote. And after today, I just may do that.

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