No One is Safe From IRS Collection Efforts… Not Even the City of Madison, Wisconsin

I have written before in this space that the IRS is the world’s most brutal collection agency. They won’t hesitate to come after anyone that they believe owes money to the agency. Most of the time, it is taxpayers and business owners that face these aggressive collection efforts – but sometimes, it’s celebrities or other public figures that find themselves in hot water.

This month, however, we’re going to highlight a case that is truly an eye-opener: the city of Madison, Wisconsin has found itself in the midst of an IRS dispute and will owe hundreds of thousands of dollars of back taxes to the agency. As a recent WatchDog.org article explains:

The federal tax code is so complicated even the City of Madison has trouble deciphering it.

The city recently reached an agreement with the Internal Revenue Service to pay back $580,000 in taxes to the federal government over its failure to report some life insurance benefits as income for city employees. Madison is also in negotiation with the state Department of Revenue to settle on back taxes owed, which could cost around $300,000.

“We discovered (the error) over the past year-and-a-half and calculated the impact,” said city finance director David Schmiedicke. ”When we fully understood the federal tax law in this area we reached out to the IRS.”

Most employees can purchase up to $50,000 in group-term life insurance policies with pre-tax dollars, according to IRS code. In other words, the employee gets a tax break for purchasing some life insurance through work. The employer, too, reduces some of its payroll taxes owed for Social Security and Medicare.

The cost of premiums for any policy with insurance benefits exceeding $50,000 is supposed to be included as income to employees for tax purposes. But Scmiedicke said for decades the city failed to do that for approximately 2,200 employees.

Thankfully for Madison taxpayers, the IRS can only look back three years for missed payments in this area, and the Department of Revenue can only look back four years. That’s millions of dollars in unpaid taxes for which the city and its employees will not be responsible.

Ask yourself this question: if a large American city, presumably with a full time accounting staff, can’t make sense of the IRS tax code… how in the world is an everyday taxpayer supposed to do so? Taxpayers have more important things to do with their life than spend hours poring over the tax code.

And yet, a simple mistake could bring the full power and fury of the IRS crashing down. In the case highlighted above, we can assume that the city of Madison will come up with a plan to pay their back taxes. But too many taxpayers find themselves with an impossibly large bill. Then, when they can’t pay it, IRS penalties and interest make the situation even worse.

If you’re facing an IRS dispute, you’re not alone. We want to help. Please contact us today to learn more!