It’s Almost Tax Day, but it’s OK, You Probably Get a Refund

April 15th, a day most of us dread, is fast approaching. Have you filed your taxes yet?

Economists believe most people are rational calculating machines, but many of us do not behave rationally about filing our taxes.

April 15th, a day most of us dread, is fast approaching. Have you filed your taxes yet?

Economists believe most people are rational calculating machines, but many of us do not behave rationally about filing our taxes.

Instead, most of us wait until the very last minute. Figures from the end of March suggest roughly 50 million – or one-third of all this year’s individual tax returns in the US – will file in the final two weeks before Tax Day.

This is NOT a good idea for most of us.

I experienced this procrastination during the past weekend when I was finally able to convince one of my sons to sit down and do his income taxes. He was very happy when the final tabulation showed a good-sized refund. Walking out the door, my son said if he had known it would be a refund, he would have done his taxes much earlier.

Most of us owe nothing

Waiting until the last minute is strange for a number of reasons. First, the majority of people in the US either gets a refund or do not owe the federal government any money. The graph below produced from IRS data shows the percentage of filed tax returns that are due a refund. Since the 1950s, a rising number of people have overpaid. About eight out of every ten tax returns filed in 2013 got a refund.

The graph shows more and more tax filers are owed money. Author’s Calculations From IRS Data

The IRS also tracks the number of returns that owe no tax. Since 1950, on average, 4% of all returns filed owed no tax. Combined this means only about 15% of all filed tax returns pay the government any extra money beyond paycheck deductions or sent in throughout the year as estimated payments.

In other words, if you are procrastinating, there is an 85% chance you either will owe nothing or will get money back, which gives you better odds that many state lotteries.

Large refunds and unlikely audits

Second, if you do get a refund, typically it will be quite large. The most recent data for the 2012 tax year showed that among people who overpaid, the typical overpayment amount was about $3,000. Of this, the average person elected to receive $2,800 back and left $200 with the IRS to pay future taxes.

Third, many people procrastinate because they fear being audited. The percentage of individual returns audited in 2010 was about 1.1% and has since fallen to about 0.9%. However, these low numbers mask huge variations in the type of returns that are subject to audit. Most of the audits happen to either millionaires or self-employed people with high income, not to the public.

About 7.5% of people that declare income over a million dollars and, 2.7% of self-employed people earning between $200,000 and a million dollars, received audits. As for the rest of us – excluding those who declared self-employment or farm income – the chance of an audit is about 0.3%.

Approximately the same amount of people that visit emergency rooms each year for slipping or falling in a bathroom end up with IRS audits. Moreover, among this small group chosen for auditing, one out of every five has no changes made to their return after the IRS examination.

Lightning-like odds

Fourth, some people are concerned they could go to jail because of making a tax mistake. The odds of this happening are in the same range as being hit by lightning. In the US slightly more than 300 people are hit by lightning each year. Since 2000, fewer than 600 people a year on average go to jail for tax crimes, meaning the chance of “doing time” for tax reasons is slim indeed.

Fifth, those who fill out their returns on their own often find the task daunting. The language is convoluted, the rules are Byzantine, and tax filing requires collecting many papers and forms that do not all arrive at the same time. The process makes many people feel confused, stupid or inadequate.

Lastly, a Gallup Poll has found Tax Day to be one of the most stressful days of the year, which is not surprising given that many people put off doing their taxes until the last moment. Research suggests procrastination relates to stress and that procrastinators often do not finish highly stressful tasks.

Trouble is, no one knows the truth

The question remains, why do so many people procrastinate when the odds are greatly in their favor? One reason is that almost no one knows the above statistics.

While the IRS is quick to take your money, it is slow to release data. There are a number of reasons why. Tax returns are due months after the fiscal year is over. The IRS does not get most individual tax returns for 2014 until the beginning of 2015. Then, many people and businesses ask for extensions.

This means it takes a long time before the IRS gets all the tax returns for a particular year. Additionally, the Statistics of Income, which is the IRS office that produces the data, has a small budget. They spend most of their money and time producing information for the Treasury Department’s Office of Tax Analysis and the Congressional Joint Committee on Taxation, so that the impact of congressional and presidential proposals to evaluate changes to the tax system.

Another reason is that the tax people owe is uncertain since Congress is constantly changing the rules, and as life’s circumstances change, different tax rules apply.

After each year’s returns are collected, the IRS publishes a large book that summarizes the information found in individual tax returns. The first chapter of each book is a lengthy summary of all the recent tax law changes. Constant changes to the tax code reduce people’s ability to forecast their tax liability, which makes people put off dealing with computing and filing their taxes.

Facing the scary unknowns

Sometimes it is rational to delay. Although most people get refunds or owe no money, about 15% of people must pay the Federal government on April 15. The typical person in this category owes about $6,000, which is twice as large as the average refund.

It is rational for people who owe the IRS money to delay filing since it gives them a longer time to gather the funds and a longer time to receive interest on their money before incurring a late payment penalty

In general, many people procrastinate when faced with the unknown because the unknown is scary. It is very rational to anticipate the worst when facing the mysteries of the US tax code.

However, for many people, Tax Day is a time of needless worry because the majority of us get back a sizable refund. While gathering together the time and papers needed to complete your tax return is a pain, four out of five of all taxpayers will find a silver lining.

Why most of us procrastinate in filing our taxes – and why it doesn’t makes any sense is republished with permission from The Conversation