Dutch and I recently got a "final notice" from the IRS for a $500 bill. We were both shocked. As we read the reams of documentation they sent, a few things came to light.
1). We made an extra $4K we had no idea about. Normally this would be great news. The sad thing was we didn't remember either getting it or spending it. Or even earning it. We are scrupulous about declaring our income. We save every W-2, and we carefully send them in. Plus we are too retarded to figure out how to make money under the table. I sometimes wish we weren't such law-abiding citizens, especially when we get treated like tax evaders. If only!
2). After sending in many correct "address change" forms, the IRS still doesn't know where we live. Hence the "final notice" was sent certified mail, the only mail smart enough to overcome their postal ineptitude.
3). After a lot of digging (I couldn't look at it anymore-- I had hit my paperwork saturation point hours earlier after trying to make sense of my official lay-off papers) Dutch divined that the total corresponded eerily with an amount we were forgiven for a defaulted credit card we had paid off in return for having the principle reduced. At the time we thought it was a great thing to get those creditors off our backs, to clear that account. Paying off debts is good-- so we thought. No where in our wildest dreams did it occur to us that that money was income. We never saw it, or even spent it. The vast majority of it was bank fees, collection fees, and exhorbitant credit card interest. Besides, it wasn't free. We paid thousands of dollars for the privilege.
Our minds were boggled. Did we have to pay taxes on our Costco refund check from AMEX? What about coupons and two-for-one deals-- is that income, too? What about sales? What about my mom's free babysitting? What about other debts we pay off early-- is that taxable savings, too? Every day I am healthy and I don't go to the hospital, I am saving money (and so is my insurance), too. We are "cheating" the IRS from hundreds of untapped resources.
Why doesn't the IRS go after GM, or drug traffickers, or prostitution rings? I hear on the radio that GM simply doesn't pay taxes-- they have an army of lobbyists and legislators busily creating tax loop holes especially for them. The oil industry and Hollywood still don't pay taxes. Our tax system is horribly unfair. Clearly working as a teacher does not pay, and neither does being honest.
I can quit my whining. It turns out we don't have to pay it because we were insolvent at the time (our debts out-value our assets). I have never been so grateful for being broke. Thanks Papa D.
And thank you MLB, for the empowering comment!