Are You a Tax Procrastinator?

On the pain scale, preparing income taxes falls somewhere between a visit to the doctor and a visit to the dentist. All are necessary in the long run, but oh so easy to put off until tomorrow, or the next day, or the day after that.

But why do we procrastinate, foot-drag, dither and delay filing our income tax, even when we owe nothing or can claim a refund? After all, as Ben Franklin observed, taxes rank right up there with death in life's short list of inevitabilities.

Yes, you can delay the paperwork by filing an extension, IRS Form 4868, but you cannot delay the paying. What's more, failure to do either can seriously restructure your financial picture for the worse.

Kathleen Vohs, assistant professor of marketing at the University of Minnesota's Carlson School of Management, offers a clinical explanation for procrastination in general.

"People first choose to regulate their emotions, meaning that they would rather focus on feeling good for longer than deal with this unpleasant task," she says. "When we are faced with an averse task, people who would rather manage their emotions first will give priority to feeling good for longer, and consequently put off that unpleasant task until the very last minute."

Money coach and author Ruth Hayden knows what drives her foot-dragging clients:

"Usually, any form of procrastination is either fear or rebellion. How much am I going to owe? Are 'they' going to take it away from me? What if I can't do this? So they just avoid it," she says.

Steve Fishman, attorney and author of "Working for Yourself", says there may be more nefarious reasons why some taxpayers delay or skip filing altogether.

"Maybe they are doing other kinds of cheating and are afraid that if they file, the IRS will discover some of those bad things," he says. "There are many, many people who don't file and they get away with it for years and years. But you never know when you'll get caught, and you'll face really big penalties when you do."

Then there are the protesters who claim that income taxes are inherently illegal. You can read more about them in a special section of the IRS site devoted to frivolous tax arguments.

"These are the fringe groups that claim it's unconstitutional. These people have meetings and Web sites and stuff, but it's all ridiculous," says Fishman. "The latest one who got caught was Wesley Snipes. He listened to some of these people and claimed it was not constitutional. That's not going to work."

Slacker Statistics

The IRS estimates that 10.3 million individuals will apply for a six-month extension this year out of almost 140 million individual Form 1040 filers. That's slightly more than asked for extra time last year, even though this filing season taxpayers have added incentive to complete their returns; filing is the only way to receive an economic stimulus rebate check later this year.

That counterintuitive tendency to leave money on the table isn't that unusual. According to the IRS, 1.3 million individuals who failed to file a tax return in 2004 left a total of $1.2 billion in unclaimed refunds in the coffers. Half of those nonfilers would have received a refund of more than $552. Some also may have been eligible for the refundable earned income tax credit.

The Slippery Slope

There are perfectly legitimate reasons to delay filing, and no penalty to do so, provided you apply for an extension and pay the taxes you owe by the mid-April deadline. But failing to pay and/or file can be the first step down a very steep and slippery slope.

San Francisco CPA and former IRS agent Robert Adams has represented clients before the IRS who have slipped well down that slope. He estimates that four out of five clients with delinquent tax issues are either self-employed or have Form 1099 issues, while just one-fifth are W-2 wage earners. He says in many cases clients who fail to file continue to do so for fear of being caught and stuck with a bill they can't pay.

"I had a client who hadn't filed a tax return in 20 years. Guess what his business is? Bricklayer. Cash on the barrelhead," says Adams. That reluctant taxpayer's problem was compounded by his procrastination. If, as required by law, he filed all those delinquent returns, he would be, in Adams's words, "a dead man" because of the massive bill of unpaid back taxes plus penalties and interest.

Even wage earners, whose taxes are theoretically withheld automatically, can get in a jam.

"Typically what happens is, he gets short of cash, he goes to his employer and says, 'Change my withholding allowance from one, which I'm entitled to, to nine because I have eight kids at home,' and he doesn't have the eight kids," Adams says. "So essentially he gets no tax withheld. Then comes April 15th and he looks at his taxes and sees, oh my God, I owe $4,000. So he figures, since I don't have $4,000, I won't send in my return, because if I do, they'll know I owe $4,000 and they'll catch me."

Our Delusional Thinking Among Procrastinators

• Delusion No. 1: If I put off filing until the last minute, I'll have less chance of getting flagged for an audit amid the flood of deadline filers. "I don't think so," says Adams. "I've never heard that on either this side of the desk or the other."

• Delusion No. 2: Since I didn't make all of my estimated quarterly payments, I just won't file this year and can start fresh next year. "A lot of people miss an estimated tax payment in the course of a year," says Fishman. "That's not that big a deal; you just have to pay interest and a penalty, which works out to be about what you would pay on borrowing money."

• Delusion No. 3: I don't need to go to all the trouble of filing because I didn't make enough money to make it worth the IRS's trouble to come after me. "As a matter of fact, IRS statistics show that people who make less money are audited more frequently than people who make more money. The reason for that? Abuses of the earned income tax credit are unbelievable," says Adams.

Getting Back on Track

So you've slipped, maybe several times. You're late or you didn't file at all. Don't panic. While the IRS can be sticklers in many respects, they are quite flexible when it comes to working out payment plans. You may even be able to reduce your overall tax bill through an offer in compromise.

The first step may be the hardest: Get to the root of why you procrastinated in the first place. Perhaps you have bad family associations with taxes, a divorce suddenly placed your taxes in your hands and you don't want to think about it, or you are a successful professional who is too embarrassed to admit that taxes baffle you.

"You can't suggest to a client to do an offer in compromise if he or she still has fear about taxes, because part of the deal is, they can't get behind again," says Hayden. "If you haven't dealt with why you procrastinated in the first place, you're going to keep doing it. They have to be in a routine in taxes before an offer in compromise can even work, because otherwise they'll just blow it."

The second step is to admit that you've been remiss. Best bet: Come clean to an accountant who can help you explore your options before you contact the IRS.

"If you're behind, just get current today," says Hayden. "That's the IRS philosophy. That requires a structure change, because if somebody can't pay their taxes today, they're always going to be in debt to the IRS."

The third step is to resolve to live on your net income, not your gross. That way, you'll avoid the tax trap for good.

"Self-employed people think they can put off taxes because they don't have the cash flow and they spend their gross instead of their net," says Hayden. "To catch up is just too hard, and then it becomes absolute fear; they don't know how to deal with it so they keep putting it off. You cannot spend your gross -- it's not a real number."